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Moscow February 13 , 2007

Energy Industry: Retarding or Driving Force for Economic Advancement ?. Anatoly Chubais Chairman of the Management Board RAO UES of Russia . Moscow February 13 , 2007. Economy. Demand. Energy Industry. Energy Industry: Retarding or Driving Force for Economic Advancement?.

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Moscow February 13 , 2007

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  1. Energy Industry: Retarding or Driving Force for Economic Advancement? Anatoly Chubais Chairman of the Management Board RAO UES of Russia Moscow February 13, 2007

  2. Economy Demand Energy Industry Energy Industry: Retarding or Driving Force for Economic Advancement? Development Retardation Main sections of this Presentation: • Energy Industry: Needs of the Economy • Energy Industry: Market Reform and Development Strategy • Energy Industry: Impetus to Economic Sectors

  3. kWh in billions 1990 level Average annual rate of growth in 2000-2005: 1.7% Average annual rate of growth in 2006: 4.2% Needs of the Economy Electricity Consumption:Approaching Historical Highs Source: Forecasted Balance of Electricity and Capacity for 2006-2010 (baseline scenario); RAO UESR estimates

  4. 180 Source: RAO UES of Russia 2006vs. 1990, % 170 1990 = 100% 160 160 150 140 130 124 121 120 115 110 110 108 110 106 105 104 102 100 Tyumen Kuban Udmurtia Moscow Karelia Astrakhan Dagestan Vologda Leningrad Belgorod Kaliningrad Needs of the Economy Peak Load Regions: Exceeding the Electricity Consumption Peak of the Soviet Period

  5. Exhaustion of generation additions using existing capacity Change in demand trends Needs of the Economy 2006-2010: Changes in Electricity Consumptionand Required New Capacity Source: Resolution of the Russian Government of November 30, 2006; RAO UESR estimates 1,300 Average annual increase in 2006-2010: 5.0% 1,198 1,200 kWhin billions Dramatic growth of demand for new capacity Revision of Investment Program for the energy industry:from 23.4 GW to 40.9 GW 1,134 1,100 1,086 1,035 1,000 984 900 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)

  6. What makes this possible? Reform of theenergy industry: turning into a competitive sector Development strategy: strategy finalization Effective demand

  7. GOALS: • to create market players • to transfer to market pricing principles Energy Industry: Reform and Development Strategy Reform of the Electric Power Industry:National Policy Essence of the reform: separation of monopolistic and competitive sectors Generation Competitive sectors Electricity sales Market rules Government as regulator Dispatching Regulated tariffs • GOALS: • to reorganize infrastructure for market operations • to ensure nondiscriminatory access to grids Main grids Naturalmonopolies Distribution grids

  8. Energy Industry: Reform and Development Strategy RAO UES of Russia: Pre-reform Structure RussianFederation Minority Shareholders of the Parent Company 52% 48% RAO UES Centralized Dispatching Administration High Voltage Grids + Grid Services 32 FederalPower Plants 73AO-Energos Generation Grids Sales

  9. Private shareholders Government System Operator IDC Holding Company Independent Generation Companies Energy Industry: Reform and Development Strategy Russian Electric Power Industry:TargetStructure Monopolies Competitive Sectors Territorial Generation Companies (14) FGC Wholesale Generation Companies (6) Competitive Market Rosenergoatom Hydro WGC (1) Central Siberia North- West Ural and Volga Sales Companies Engineering Centers FGC – Federal Grid Company IDC – Interregional Distribution Company

  10. Reform Concept Investment Deployment Concept Competitive sectors (primarily thermal generation) Private investments Investments from the state budget Monopolistic sectors Energy Industry: Reform and Development Strategy Investment Deployment Concept forthe Electric Power Industry

  11. 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

  12. 28.3% Own funds 825,586 820,211 900,000 Raised funds 753,652 14.7% 800,000 Issue of additional shares 12.6% 700,000 520,452 Payment for technical connection 600,000 8.7% 500,000 Revenue from sale of assets 8.4% 400,000 Federal budget 7.2% 300,000 180,019 Funds from external investors for projects under IGM 200,000 4.8% 100,000 Long-term projects for expansion of the Investment Program 4.5% 0 2006 2007 2008 2009 2010 1.2% Special purpose investments Total in 2006-2010: Accumulation fund, accumulated own funds 0.2% 3,099,920,000,000 rubles Other 9.4% Energy Industry: Reform and Development Strategy Investment Program of RAO UES Holding Company: Scope and Mechanisms rublesin millions 100 60 30 15 5 Step-by-step increase in the share of electricity sold at nonregulated prices, %

  13. 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 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 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

  14. 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 General layout of electric power facilities until 2020 5-year investment programs of energy companiesas from 2008 Investment Program of RAO UES Holding Company for 2006-2010 2010 2006 2010 2020 2030 2006

  15. 20,000 MW 15,000 10,000 5,000 0 Energy Industry: Reform and Development Strategy Capacity Commissioning Program MW 2006-2010 2006 2007 2008 2009 2010 Thermal generation WGCs, TGCs, RAO UESR 1,196 1,474 1,596 7,576 16,979 28,821 Small TGC HPPs 2 110 161 96 124 493 Hydro WGC 56 696 477 1,548 2152 4,929 Total for Holding Company 1,254 2,280 2,234 9,220 19,255 34,243 Other commissionings 402 771 2,093 2,201 1,190 6,657 Total commissionings, MW 1,656 3,051 4,327 11,421 20,445 40,900 2006 2007 2008 2009 2010

  16. Gas Fuel oil Coal Other 1% 1% 1% 27% 29% 37% 3% 3% 69% 67% 2% 60% Energy Industry: Reform and Development Strategy 2006-2015: Changes in the Fuel Mix 233.4 250 tonnes of fuel equivalentin millions 212 179.3 200 143.1 150 Gas Coal 90.6 100 68.9 50 0 2006 2010 2015

  17. Efficiency 34% Gas-fired generation: steam-power technology replaced bycombined cycle gas technology (CCGT) Efficiency 34% Coal-fired generation: circulating fluidized-bed technology; Implementation, Innovation, and Reconstruction technology; and super-supercritical technology Hydropower: active development of pumped storage power plants and tidal power plants Energy Industry: Reform and Development Strategy New Technological Structure in the Electric Power Industry Generation Efficiency >50% Efficiency 42-46% Transmission Grids become an active element of the energy system, with a capacity to change power and energy flows Grids are a passive element of the energy system Implementation of Flexible AC Transmission Systems (FACTS), new DC transmission technologies (DC Converters), and high-temperature superconductivity technologies Dispatching Mode control using administrative and command methods Mode control through economic motivation of market participants Radical renovation of data processing technologies based on SCADA-EMS. Creation of 3-tier technological vertical of dispatching centers Creation and servicing of the electricity market, system service market, and balancing market

  18. Energy Industry: Impetus to Economic Sectors RAO UES of RussiaInvestment Program –Factor for Power Plant Engineering Development Planned expenses related to purchase of primary thermal power equipment for generation facilities of WGCs and TGCs 250 212.4 210.3 200 rublesin billions 146.3 150 96.1 100 50 29.8 0 2006 2007 2008 2009 2010 Total for 2006-2010: 694.9 billion rubles Purchase orders for construction materials can be placedon the B2B-Energoonlinetrading floor athttp://www.b2b-energo.ru

  19. 2006 2010 $0.68 billion $1.5 billion Sales Generation facilities 17 GW 8 GW Share of services in portfolio of orders less than 10% 15% ~ 200 Share of exports in portfolio of orders more than 80% 40% ~ 450-500 Corporate Investment Program for 2007-2010: $1 billion ~ 300-400 Key investment sources($ in millions) Issue of additional shares in Power Machines Bonded loans and bank loans Sale of assets Energy Industry: Impetus to Economic Sectors Factor for Power Plant Engineering Development as exemplified by Power Machines

  20. 25 19.5 19.4 20 15 8 10 3,5 5 0 2006 2007-2011 (average annual) Materials High-voltage equipment 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 rublesin billions Total procurement expenses for 2007-2011: Equipment: 97.5 billion rubles Materials: 97.2 billion rubles Purchase orders for construction materials can be placedon the B2B-Energo online trading floor athttp://www.b2b-energo.ru

  21. Energy Industry: Impetus to Economic Sectors … Factor for Coal Industry Development Coal demand in TPP sector (excl. isolated generating plants) for 2006-2010 tonnesin millions Increased annual coal consumption in 2010 as compared with 2006: 38 million tonnes (~31.5%) Source: RAO UES of Russia

  22. 200 186 174.8 166.9 162.9 143 150 100 50 2006 2007 2008 2009 2010 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 cu min billions 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

  23. 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) 1.8 tonnesin millions 2 Demand for cement of TPPs and HPPs of the Holding Company: new construction and technical upgrading: 7.2 million tonnes 1 0.3 0 2006 2007-2010 (annual average) rublesin billions 6 4.8 Cement expenses of TPPs and HPPs of the Holding Company: new construction and technical upgrading: 19.2 billion rubles 4 2 0.6 0 2006 2007-2010 (annual average) Purchase orders for construction materials can be placedon the B2B-Energo online trading floor athttp://www.b2b-energo.ru

  24. 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) 10.9 rublesin billions 12 8 Research and development (in thermal power industry only): 43.5 billion rubles 3.9 4 0 2006 2007-2010 (annual average) 66.3 80 rublesin billions 60 Construction and installation (in thermal power industry only): 265.2 billion rubles 40 10 20 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/

  25. 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

  26. Economy Demand Electric powerindustry Economic retardation Reform of the electric power industry turns it into a driving force for economic advancement Reform of the Electric Power Industry Economic advancement

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