Understanding the key drivers behind Russian power sector reform


By Aida Mezit

Russian energy facts and figures

Russia is home to the world’s largest natural gas reserves, the second largest coal reserves, and the eighth largest oil reserves. Russia is also the world’s second largest renewable energy producer, harnessing the power of water by its hydropower giant RusHydro. The common wisdom is that with the abundance of natural resources it hardly needs to tap into energy efficiency programs, smart grid and expensive non-traditional renewables.

Russia is the fourth largest electricity market globally and with the country’s growing prosperity the demand for electricity has steadily risen over the past decade. The Federal Grid Company operates the world’s largest high voltage network with 118,045 km of electricity transmission lines and 758 substations. The company plans to spend $6 billion annually over the next five years on renovating and expanding the network according to a recent Bloomberg Report. IDGC Holding is an umbrella company for regional distribution companies that operates the network of over 21 million km. In 2011 the company invested $4.6 billion in development of its distribution grid.

Russia’s Energy Minister Alexander Novak has stated that the power sector – including generation, transmission and distribution – will need $362 billion of capital expenditure through 2020. Russia is at the cusp of the largest power reform since the Soviet-era mass scale electrification of the 1950s.

The biggest hurdle for the urgently needed modernization of Russia’s power sector is the lack of economic drivers for utilities to invest in infrastructure and diversify their business. For companies to invest and diversify, they need to operate in a competitive environment which thrives on innovation and a consumer-centric approach. Competition is all about capturing the market share and it leads to a proliferation of new products and services, offering better value and more choices to the consumer.

The largely unbundled European utilities, helped by cutting edge technologies and progressive policy, are hard at work making their operation more efficient and expanding their offerings to consumers.

This scenario is somewhat different from the current Russian power and utility sector. Even though it underwent a partial liberalization in the late 1990s, in many ways it still bears the legacy of the state-governed Soviet era, with economic and commercial interests still to a large degree dependent on government decisions.

For instance, the policy of cross subsidies and capped tariffs distorts the markets by keeping the prices for domestic consumers artificially low. The knock-on effect is that utilities are largely disincentivized from making costly investments in the network if they cannot charge the (near) market prices for electricity and run a fully commercial operation.  

This has an immediate impact on funding. As most of the funding needs to come from private investors (both domestic and foreign), they will keep their coffers closed until there is more transparency  in the way the sector operates, with the policy regarding the subsidies and tariffs fully revised.

The policy wrangling of the past decade has meant that only limited investments have been poured into the sector where, according to research by Renaissance Capital, the worn out level of the power grids amounts to around 70%. Of the total 2.5 million km of powerlines in Russia, 1.5 million km have already worked out their economic life.

According to Russia’s Energy Minister Alexander Novak, the sector will need Rub11.4 trillion ($362 billion) of capital expenditure through 2020, and the key challenge the industry faces is where to find the money, because, “current sector regulation does not motivate companies to invest.”

On a more positive note, the latest power policy draft was evoked by the Duma a few months ago as not being sufficiently in favour of the commercialization of the sector.  Currently a  new draft is in the making  which  promises a more progressive  model with  limited state interference  that will open up the sector to  the much needed investments. The jury is out on which direction the new policy will take, but according to a number of experts, faced with the ailing infrastructure and sluggish developments, the government will have to make a U-turn on its current policy, loosening regulation and opening up the internal markets.

The Smart Utilities Russia conference will discuss this complex economic and political mix governing the Russian power sector, map out its future development and explore the vast commercial potential for all who take part in its grid modernization.

The first day of the programme will be dedicated to the strategy, investments and markets vs policy discussions. The second day will be focused on smart grid projects that have been rolled out nationally, along with the European and global perspectives from our guest speakers.

The aim of the conference is to offer a comprehensive portrayal of the Russian power sector – from policy to specific on-the ground-projects – and how to transition to an open, competitive and consumer embraced sustainable energy economy.

For more information on Smart Utilities Russia 2013 see www.smartutilitiesrussia.com