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RAO UES of Russia Anatoly Chubais, CEO European Policy Centre Brussels May 15, 2008

Russian Power Sector Reform: New Market opportunities for Russia and the EU. RAO UES of Russia Anatoly Chubais, CEO European Policy Centre Brussels May 15, 2008. Contents. Reform results Structural changes Markets Investment Building up new markets Post-reform risks

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RAO UES of Russia Anatoly Chubais, CEO European Policy Centre Brussels May 15, 2008

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  1. Russian Power Sector Reform: New Market opportunities for Russia and the EU RAO UES of Russia Anatoly Chubais, CEO European Policy Centre Brussels May 15, 2008

  2. Contents Reform results Structural changes Markets Investment Building up new markets Post-reform risks Risk of market monopolization Risk of price manipulation Electric Power Sector in Russia and EU Member States Current results, problems and cooperation prospects

  3. Structural changes 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

  4. Russian Government 52% 48% Centralized Dispatching Administration High Voltage Grids 32 Federal Power Plants 73 АО-Energos Generation Transmission andDistribution Grids Regional Dispatching Administrations Supply Structural changes Pre-reform RAO UES structure Minority Shareholders RAO UES

  5. Structural changes АО-energo unbundling: Key element of structural changes 73 АО-energos Generation Transmission andDistribution grids Regional Dispatching Administrations Supply Wholesale and Territorial Generation Companies (OGKsand TGKs) Federal Grid Company(transmission grids) System Operator Supply companies Interregionaldistribution grid companies (distribution grids)

  6. Structural changes Power Sector Reform: No objectors left Certain Officials in the Government and the President’s Administration Conservatively-minded energy specialists and scientists UES reform UES reform The majority of Senators The majority of Governors Key political factions in the State Duma Influential oligarchs The majority of minority shareholders 2000-2008

  7. Structural changes Post-reform Power Sector structure Monopolistic sectors Competitive sectors System Operator 6WholesaleGeneration Companies(OGKs) 14Territorial Generation Companies(TGKs) Federal Grid Company Competitive market Rosenergoatom(NPP) Wholesale Hydro Generation Company 11Interregional Distribution Companies(IDC) Independent Generation Companies Supply Private property Government property

  8. Markets Market system: What is done, what is to be done Balancing Market 2005 Competitive Electric Power Wholesale Market since 1.09.2006 Capacity Market 2008 Retail Market since 1.09. 2006 Ancillary Services Market 2008 Derivative Financial Instruments Market • Liberalized • Trans-border • trade • 2008-2009

  9. Markets Competitive wholesale market: Pace of liberalization… Wholesale market (NOREM) 100% 100% ~90% Actual pace of liberalization (facts and estimates) Mandatory increase of the liberalized market share 100% 80% 80% ~70% Excluding Household consumption ~60% 60% 60% 50% ~40% ~35% 40% ~ 25% 30% ~18% (Sept. 06) ~20% (Jan. 08) 25% 20% 15% 10% 5% 0% 0% Sept. 1, 2006 Jan.1,2007 July 1, 2007 Jan.1, 2008 July1, 2008 Jan.1, 2009 July 1, 2009 Jan.1, 2010 July 1, 2010 Jan.1, 2011  All new capacity and consumption commissioned after 2007 go to the free market

  10. Markets …and Supply/Demand Equation Prices Average prices (Europe+Urals and Siberia), Euro/MWh 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 Year 15 18 12 12 9 6 Sept . 06 Oct . 06 Nov . 06 Dec . 06 Jan . 07 Feb . 07 Mar Mar Apr . . 07 07 . 07 May . 07 Jun . 07 Jul . 07 Aug . 07 Sept . 07 Oct . 07 Nov . 07 Dec . 07 Jan . 08 Feb 08 . 6 Source: Administrator of Trade System (ATS)

  11. Investment Prospects until 2030: Target Concept, General Scheme, Investment Programs 2030 Target concept for Development of the Russian Power Sector until 2030 General Scheme for allocating power capacity until 2020 2020 5-year investment programs for energy companies from 2008 2006-2010 Investment Program for UES Holding Company 2010 2006 2010 2020 2030 2006

  12. Investment CAPEX 2008-2012 – over 119 bn Euro Sources of finance and expenditure Total : ~ 119.6billion Euro Sources of finance, billion Euro Expenditure by business, billion Euro 14.9 (12%) 1.1 (1%) 4.5 (4%) 5.2 (4%) 24.2 (20%) 39.2 (34%) 48.4 (41%) 65.6 (54%) 36.1 (30%) Generation (thermalandhydro) Companies’ funds Private investments Grids (transmission and distribution) Credits and loans Other Dispatching State budget financing Far East

  13. Investments 2002-2012: Volume of financing and capacity commissioning 2002-2012: Volume of financing Volume of financing(generation+grids+dispatching) Capacity commissioning as of the years (thermal- + hydro generation) 30 16 28.3 27.3 billion Euros 13.7 12.9 22.3 12 22.2 20 19.5 10 8 9.9 5.1 10 4 4.6 2.1 2.2 ГВт 1.9 3.5 2.8 1.7 2 1.9 1.7 0.6 1 0 0 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2009 vs. 2002: Growth of annual investments by a factor of 17 2011 vs. 2002: Increase in annual commissioning, 23-fold Average annual volume of generating capacity commissioning (including NPP), according to the General Scheme up to 2020. 2006-2010: 7.2 GW 2011-2015: 16.3 GW 2016-2020: 13.7 GW Investment

  14. New markets Development trends: Current and emerging types of business activity (Expert estimates) 2010 vs. 2006 Power machinery(procurements solely for OGKs and TGKs): ~21.6 billion Euro Construction materials(solely expenditure on cement of TPPs and HPPs): ~ 0.3 billion Euro 4.5 - fold 8 - fold Electrical equipment (procurements solely forFGC): ~ 7.6 billion euro R&D(solely in thermal power sector): ~ 2 billion euro 4 - fold Power Sector Development Program 4 - fold Coal: ~ 731 million tonnes 40% Construction and installation(solely in thermal power sector): ~ 9 billion Euro Gas: ~ 848 billioncub. m. 8 - fold 30% Turnkey project implementation (EPC/EPCM-contracts) ~8.5 billion Euro (as of 01.03.2008)

  15. Post-reform risks

  16. 100% 80% 60% 40% 20% 0% July 1, 2009 Jan.1,2007 July 1, 2007 Jan.1, 2008 Jan.1, 2009 Jan.1, 2010 July 1, 2010 Jan.1, 2011 July 1, 2008 Sept.1, 2006 Risks Market liberalization refusal risk Actual pace of liberalization (facts and estimates) 100% ~90% Mandatory increase in the liberalized market share 100% 80% ~70% Exclusive of Household consumption ~60% 60% 50% ~40% ~35% ~20% (Jan. 08) ~ 25% ~18% (Sept. 06) 30% 25% 15% 10% 5% 0% Annual average growth of electric power tariffs in 2005-2007: 10.7% Annual average expected growth of electric power tariffs in 2008-2011: 20.7% Arguments against the risk • Legal:Law on electric power bans state regulation of prices since 2011. • Market liberalization schedule was introduced by the Russian Government regulation. • Political:In fact liberalization schedule is a direct promise of the Russian Government to the Russian and foreign investors. • Economic:Review of liberalization schedule will destroy investment program of power companies. Conclusion: Risk is improbable

  17. Country/Region Company Market Share France EdF 82% Italy Enel 45% Spain Endesa 38% Germany E.On 32% Scandinavia Vattenfall 22% UK British Energy 20% Russia Gazprom 20% Risks Risks of market monopolization by major player Generation: Internal market shares of European energy companies As of July 1, 2008, affiliation is prohibited in the Russian competitive and monopolistic energy sectors • Risk reduction instruments – • Expanded special powersof antimonopoly bodies: • Antimonopoly regulation and control in the wholesale and retail markets (in accordance with Article 25 of the Federal Law "On the Electric Power Industry") • Development of antimonopoly regulation and control rules in electric power sector (draft of GovernmentRegulation– Q2 2008)

  18. Coal + fuel oil (32%) Gas 68% Independent producers 21% Gazprom structures 79% Gazprom controls the supply of approximately 54% of fuel for Russian thermal power sector Risks Risk of electricity price manipulation through fuel prices Fuel balance structure of thermal generation in Russia Structure of gas supplies for thermal generation in Russia • Risk reduction instruments: • Expanded special powers of antimonopoly bodies: • Antimonopoly regulation and control in the wholesale and retail markets (in accordance with Article 25 of the Federal Law "On the Electric Power Industry") • Development of antimonopoly regulation and control rules in electric power sector (draft of GovernmentRegulation– Q2 2008) • Existing powers of antimonopoly bodies: • Penalties (up to 10% of fuel revenue in local markets) for monopoly abuse • Behavior conditions for monopolists – as strict as possible forced sale of assets

  19. Electric Power Sector in Russia and the EU: Current results, problems and cooperation prospects

  20. Russia and Europe EU strategic investors: Participation in the IPO and competitive OGK/TGK share sale … 21.6 billion Euros is what has already been received from private sector investments as a result of IPOs and competitive sale of OGKs/TGKs shares • ENEL (June 2007): • Purchase of the State’s share in ОGК-5 stocksat auction for 1.1 billion Euro. • E.ON (September – October 2007) • Purchase of additional issue of ОGК-4 stocks and purchase of State’s share in ОGК-4 stocks • for 4.1 billion Euro. • Fortum (February – March 2008) • Purchase of additional issue of ТGК-10 stocks and purchase of State’s sharein ТGК-10 stocks • for 2 billion Euro. 14.4 (67%) 7.2 (33%) Billion Euro Foreign strategic investors Other strategic and portfolio investors

  21. Russia and Europe … and present role in the Russian Power Sector ENEL E.ON Fortum Original shareholding: ~25% of OGK-5 shares Original shareholding: ~73% of OGK-4 shares Original shareholding: ~76% of TGK-10 shares Current shareholding: ~60% OGK-5 shares * Installed capacity of OGK-5 power plants – approximately 8.7 GW** Current shareholding: ~76% OGK-4 shares * Installed capacity of OGK-4 power plants – approximately 8.6 GW** Current shareholding: ~76% TGK-10 shares* Installed capacity of TGK-10 power plants – approximately 3.1 GW** Total installed capacity of RAO UES power plants in 2007 -161.2 GW, including thermal OGKs and TGKs – approximately 108 GW • European strategic investors control companies with total capacity of 20.4 GW– • approx. 10% of the Russia’s installed capacity • 13% of the RAO UES’ installed capacity in 2007 • 19% of all thermal OGKs and TGKs installed capacity * - As of March 2008 **- At the moment of share purchase exclusive of commissioning under investment programs until 2012

  22. Russia and Europe Supply of Equipment: Increase in orders from Russia 400 Volume of orders of thermal OGKs and TGKs to power machinery and electrical equipment companies in EU countries 320.3 300 Million Euro 200 122.7 92.3 100 30 0 2005 2006 2007 2008 European companies account for approximately 27% of total volume of orders for primary equipment for thermal OGKs and TGKs

  23. “Electric Power Border” between the CIS/Baltic States and Europe: Hurdle on the way to Russia-EU cooperation Russia and Europe Solutions: Synchronous interconnection of UCTE and IPS/UPS Power Systems Results of the feasibility study of synchronous interconnection (April 2008): • Synchronous interconnection project has nounsolvable problems of technical, operational or organizational character • Synchronous interconnection – long-term prospect • Synchronous interconnectionrequires major investments on both sides in the development of grid transmission capacity and improvement of system security • Synchronous interconnection mid-term alternative • – DC links (asynchronous interconnection)

  24. Russia and Europe Functional, Legal and Ownership Unbundling: Similarities and differences 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)

  25. Countries supporting ownership unbundling of VICs Countries unsure about the type of model Others By 2000– Split of opinions in the EU: Liberalsvs.conservatives 2008: Russia’s position helps European liberals Russia and Europe Ownership Unbundling: European Energy Policy Evolution Sources: EU, IMF Countries opposing ownership unbundling of VICs Until 1990– unity of conservatives

  26. Chemistry of the Russian reform Basic principles: Market, Competition, Transparency + Best global practice in reforms The Russian model of Power Sector reform + In-house know-how gained during the reform We do not consider this recipe the best option for Europe – Each State has its own “mix of ingredients” But we are convinced that market values – even in such a complicated area as the Power Sector and in such a unique setting as Russia – are central and indispensable components

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