Culture

Best Prospects

Industry experts estimate that 60% of Russia's existing power capacity is scheduled for retirement or rehabilitation by the year 2010, including both gas and coal fired units.  The principal items for rehabilitation or retrofitting will be turbine units and boilers.  As part of this rehabilitation program, greater attention will be paid to environmental and energy efficiency at power generation facilities.  Among the most significant equipment needs for the power generation sector will be for thermal power plant modernization, fuel switching, conversion, plant construction and life extension of existing equipment.  As for hydroelectric plants, plans include the rehabilitation, modernization and expansion of existing plants and the construction of new plants.  The Russia power sector also presents specific oppo rtunities for developing and installing small generating capacities (under 30 megawatts).

In terms of additional equipment and technology, the industry is interested in buying advanced, computer-based, energy management systems for internal power plant operations and system level control; environmental control equipment for coal and gas fired power plants; and process control equipment.

The updated reform plan stipulates changes to the entire technical structure of the power industry.  The following slide from CEO Chubais' presentation (cited above) illustrates the planned changes in generation, power transmission and dispatching technologies.

Market Entry

There are several ways to approach the Russian energy market including participation in trade fairs specializing in electric power products, advertising in professional trade journals and direct mail. Complete information about the produ cts, including specifications, prices and delivery conditions is essential to stimulating interest.

The U.S. Commercial Service believes that the most effective way to operate in the Russian electric power market is to find an appropriate Russian partner.  Some distributors have been in business for more than 15 years and therefore have extensive experience and know-how. Their detailed knowledge of the market and many business connections enable them to find both a buyer and a seller. Many distributors may operate on an exclusive basis and may cover a large area of the country, allowing them to do a thorough analysis of sale possibilities, and to evaluate products against competitors with regard to both price and quality.   

Major foreign manufacturers of power supply equipment, including GE, Honeywell, Pratt and Whitney, Siemens, Mitsubishi and others, have opened representative offices in Russia.  Some U.S. EPCM contractors have opened their own offices as well.  Seve ral procurement officers have expressed their strong preference for suppliers to be locally based as it enhances the service element of their offering.  A number of engineering and construction services sold in Russia must conform to Russian standards including Health, Safety and Environment (HSE) requirements and must be licensed according to the Russian laws.

An important factor that American companies must consider is language.  English language penetration in Russia is rather low, around 5%.  Many decision-makers in this sector know enough English to communicate but Russian is necessary for negotiations and communication with lower level employees in large domestic companies where English is not their working language.

Market Issues and Obstacles

U.S. exporters often experience problems with government bureaucracy, poorly established rule of law and corruption in the areas such as establishing a business, tax collection, dispute settlement, property rights, product certification and standards, as well as Russian Customs clearance. Import tariffs for power sector equipment range from 5-20%, plus VAT of 18% (local suppliers are also subject to the same VAT tax on domestic deliveries).  Imported power equipment must be certified as conforming to Russian safety and operating standards by the Russian standards agency, the Federal Agency for Technical Regulations (www.gost.ru) or one of its accredited testing bodies.  U.S. companies in many industry sectors have noted that certification of imported equipment in Russia can be difficult, time-consuming and expensive.   
 

Trade Events

"Russia Power" Trade Show and Conference, May 29-31, 2007, Moscow:        http://www.russia-power.ru/


Resources and Key Contacts

http://www.rao-ees.ru/en/
www.b2b-energo.ru
http://tenderenergo.ru
http://www.mosenergo.ru/eng/
http://www.eia.doe.gov/emeu/cabs/Russia/Electricity.html
http://www.amcham.ru/


For More Information

The U.S. Commercial Service in Moscow, Russia can
be contacted via e-mail at:
Irina.Lakaeva@mail.doc.gov
Phone: 7-495-737-5030
Fax: 7-495-737-5033



Please also visit the website:

http://www.buyusa.gov/russia/en/

Russia: Energy and Power Generation Market 2007

Summary

In 2002, the Russian government began reforming the power generation industry. The main goal was, and remains, to upgrade the aging and out-dated heating and electricity infrastructure.  RAO UES (Russian Open Stock Company Unified Energy System), the national utility company, hopes to raise $118 billion in the next five years. To meet this goal, it will have to attract foreign investment. The current strategy assumes that RAO UES will close its doors as a holding company in 2008, with much of its power generation assets privatized.  This report summarizes the key elements of the reform project in order to alert U.S. companies to the changing market and potential opportunities in Russia.   

Market Demand

The Russian electric power market is the fourth largest in the world, producing 5.5% of the world's electricity.  In the late 1990s, an analysis of the power industry's performance in Russia indicated that the sector was losing competitiveness and investment appeal.  From 1991-1998, Russian electricity consumption steadily declined due to general economic stagnation and low purchasing power of the population. But since 1999, as a result of a healthier economy, electricity consumption has steadily increased and grew 4.2% year-on-year from 2005 to 2006.  This growth rate is expected to continue for the next several years, in line with general economic growth.

The Russian Ministry of Industry and Energy reports that in the first half of 2006, power plants produced 66.8% of energy, hydro stations 17.4%, and nuclear plants 15.7%.  Thermal power plants produced 382.52 billion kWthr (7.5% more than in 2005), hydro stations generated 99.55 billion kWthr (5.6% less than 2005), nuclear plants produced 89.98 billion kWthr (5.9% more than 2005).  The production of electrical energy in January-July, 2006 totaled 572.29 billion kWthr (4.7% up from the 2005 period).

Russia now finds itself needing to modernize a large portion of its power generation facilities and RAO UES hopes to attract more than $100 billion investment in the industry in the next five years.  It plans to increase capacity by 40.9 megawatts in the coming four years.  RAO UES estimates it needs 100 gas and 67 steam turbines, 125 waste heat boilers and about 70 turbines for coal-fired stations.  It is quite likely that purchase orders for power generation equipment may grow to tens of billions of dollars.  According to industry sources, last year local manufacturers produced only $2 billion worth of this equipment type, creating a promising market for foreign vendors.

Reform Process

RAO UES Plan Update Approved.  The original reform plan projected that by the end of 2006, the electricity sector of Russia would be de-monopolized.  Some significant achievements have been made, one of which is the launch of a competitive electricity pricing system in September 2006.  However, because of the size and complexity of the reform process, the deadline for reform has now been extended to 2010.   

RAO UES has made the strategic decision to sharply increase investments since some developing regions, such as St. Petersburg and the Urals, underestimated the growth in power usage and suffer from severe supply shortages that are constraining economic growth.  The plan for building new facilities and power grids and replacing outdated equipment has been revised upward a number of times.  These updates were included in the overall development scheme and in February 2007, RAO UES announced its new investment and modernization program for the electric power industry.  A five-year investment

plan totaling $118 billion was approved. These investment funds will be used to build and upgrade power generating facilities.  In 2007, the first year of the updated plan, UES plans to attract $15 billion.  No other Russian corporation has requested such a large investment.  In spite of these challenges restructuring of the power sector is considered to be one of the most successful reforms in the Russian economy in the last decade.

Reform Goals:

The main goals of the reform project are to increase the efficiency of the power industry and make the sector attractive to private investors.  The updated plan is expected to improve the national power generation infrastructure, bring power supply to every building in Russia and help the industry meet the growing market demand for power generation, which has grown between 4% and 5% annually since 1999, according to official statistics.  For example, power generation currently held by the natural monopoly are to be separated and privatized.  New entities responsible for distinct activities are to be created in place of the former vertically integrated companies, with high-voltage transmission and dispatch functions remaining state-owned.  Sales and repair companies are also to be privatized.

Market Participants:

6 Wholesale Generating Companies (OGKs), 14 Territorial Generation Companies (TGKs), HydroOGK, Rosenergoatom and independent generating companies were formed as part of the industry privatization.  The government will retain ownership of: System Operator (SO), Federal Grid Company (FGC), and Interregional Distribution Companies (IDC). 

Additional information in English about OGKs and TGKs, their structure, lists of power plants included in each e ntity, and contact information may be found at:

http://www.rao-ees.ru/en/reforming/WGCs/show.cgi?WGCs.htm

Private Investments:  According to C-Novosti Information Agency Daily, the Russian government has approved RAO UES' plan for placing additional shares for wholesale and regional power generating companies as a means to attract private investment.  It is expected to attract about $8 billion of private investments in 2007-2010.  Additional shares placements are planned for OGK-3 and OGK-5 and TGK-3 and TGK-5 in 2007; for OGK-4, TGK-1, TGK-9 and TGK-10 in 2008; and for TGK-8, OGK-1, OGK-2 and OGK-6 in 2009-2010.

The following examples illustrate that large multibillion corporations are very interested in obtaining shares in the Russian power sector.  In January 2007, Norilsk Nickel, a Russian metal giant, bought shares of OGK-3 for $3 billion. Moscow-based Mosenergo, Russia's largest re gional power generating company, which supplies 80% of Moscow's heating needs, found Gazprom, the Russian energy giant as its main investor.  According to Russian government officials, the acquisition of a controlling stake in Mosenergo is crucial for the development of Mosenergo as a gas and energy corporation taking into consideration the fact that natural gas exceeds 92% in Mosenergo's fuel balance.