Power Industry Reforming

Power Industry Reform Background

The power industry is a key branch of the economy, the basis for the economic, industrial and social development of the country. Industrial enterprises, transport, housing and utilities service cannot function without heat and electricity.
The process of establishing market relations in Russia is impossible without the development of the power sector providing a stable and reliable power supply for enterprises and the population. However, within the last decades the growth of energy consumption was accompanied by the decrease in the volume of investment in the sector and the increase of non-payment. The electric power industry actually became a donor for other industries. An absence of incentives to reduce production costs in its turn influenced tariff levels. Quite often they included all actual costs. In other words, the prices (tariffs) often included all actual expenses. The insufficient transparency of the power sector, the impossibility of defining the resources necessary for maintenance and development of the enterprises, constraints on tariffs by regulating bodies ( electric power prices more slowly than the majority of other products) in the context of exaggerated industrial costs had led to the situation when more than half of the branch enterprises appeared to be unprofitable.
The electric power industry working model had a negative effect on the development of other sectors of the economy . The growing technological backwardness of power-intensive industries and housing and communal services, underestimation of power resources’ costs, absence of stimuli to energy saving had led to the situation when the specific power consumption of the economy of Russia (power consumption per a unit of gross national product) exceeded the corresponding figure of the developed countries in 2-3 times. Thus, the necessity of reforming became obvious by 2001.
Power industry reform is aimed at solving a problem of inflow of investments, funds updating, maintenance of a transparency of tariff policy and other processes of the branch in the whole. Attraction of financial streams into power industry is the main condition for maintenance of a reliable power supply. The key goal of reforming is creation of the competitive market in electric power industry and development of an effective system of tariffs regulation.
Acceptance of a legislative base of reforming became the starting point for transformations occurring in the power industry now.

Goals and Objectives of the Reform

Goals and objectives of the reform have been defined by the Governmental Resolution № 526 «On Restructuring the Electric Power Industry of the Russian Federation» of July 11, 2001. Under this document the main objectives of the reforming are as follows: maintenance of steady functioning and development of economy and social sphere, raising of efficiency of electricity production and consumption, providing of reliable and uninterrupted power supply of consumers.
The strategic goal of reforming is defined as transitioning of the electric power industry in a regime of a sustainable development on the basis of application of progressive technologies and market principles of functioning, provision on this basis of a reliable, economically effective satisfaction of solvent demand in electricity and heat in short-term and long-term prospect.

The primary goals of the reform are also:
• establishment of competitive electric power markets in those regions of Russia, where organization of such markets is technically possible;
• creation of an effective cost-saving mechanism of electric power production (generation), transmission and distribution, improvement of a financial state of the branch entities;
• energy saving stimulation in all spheres of economy;
• creation of favorable conditions for construction and operation of new capacities on electric power manufacture (generation) and transmission;
• stage-by-stage liquidation of cross subsidizing of various regions of the country and electric power consumers groups;
• creation of a lower-income strata support system;
• retaining and development of a uniform infrastructure of electric power industry including main networks and dispatching management;
• demonopolization of the fuel market for heat power plants;
• creation of a regulatory and legal framework of the branch reforming regulating its functioning under new economic conditions;
• reforming of a state regulation, management and supervision system in electric power industry;
• specifying of the status, competence and operating procedure of the authorized state body.

Taking into account further amendments to the regulatory and legal framework, goals and objectives of the Reform were concretely defined in the “Strategy Concepts of OJSC RAO "UES of Russia" for 2005-2008 (5+5) (Section «Electric Power Industry Reforming on OJSC RAO “UES of Russia on the website of OJSC RAO UES of Russia).

Effect of the Reform

For Electric Power Industry

Competitive conditions created during the Reform will stimulate enterprises to raise their efficiency: will force them to develop modern technologies, to use fuel more effective, to plan productive activity more precisely, etc…

The reform will allow to optimize the work of the United power grid of Russia, having raised efficiency of loading of generating capacities. In the electric power competitive market the more loaded companies will be those whose prices will appear lower. Volumes of the electric power sale defined during competitive bidding will provide lower combined expenditures on generation, transmission and distribution of energy in comparison with the current system.

During the reform there is an increase and centralization of the state control over an electric power industry infrastructure - electric power transmission on the main networks, functions and actives of operating and dispatching management. At the same time, (within the framework of the market development) modernization of power streams account and control systems is being carried out. All this promotes the increase of controllability of electric power system and reliability of power supply.

Market establishment will raise the attractiveness of investment network infrastructure. Development of the network complex will create additional possibilities for electric power overflows, allow to increase their volumes. Thanks to this the geography of the electricity trade, including export-import operations, will extend and become more complicated.

Division of a former monopoly into separate companies by their types of activities will allow to consolidate the management of isolated actives. It is reached, in particular, by creation of operational companies instead of holdings. Such re-structuring will raise controllability of new entities of the brunch, simplify implementation of uniform strategy, allow to consolidate and involve considerable financial sources from outside.

For Other Branches of Economy

Investment attractiveness of efficient entities and technologies of the electric power industry shall promote growth of turns not only of the electric power industry, but of the branches related to manufacture of power industry equipment, construction, metallurgy, gas industry, etc. Large-scale modernization of the existing basic production assets and the input of new ones in electric power industry shall result in increase of demands for new, more effective equipment, building-repair, design and construction works.

It shall stimulate the growth of investments into a fixed capital, both from electric power industry, and from the listed branches. There appear stimuli for the development of energy saving technologies and energy consumption schemes that shall essentially lower power inputs per a unit of the made production.

The competitive market influences significantly on a consumer's behavior, and it should not be considered as the price pressure exclusively: in the conditions of the developed competitive market consumers get new possibilities of optimization of the schedule and cost of consumption, indemnification of risks.

The Reform shall allow to solve the problem of sustained electricity supply of the consumers and to liquidate local deficiencies in the electric power, typical for a number of regions of Russia.

Finally, the competition introduced in the branch, shall give an opportunity to stabilize electric power prices for the consumers at acceptable level, and for a number of their categories (for example, some large industrial enterprises) formation of the competitive wholesale market means slowdown in electric power expenditures.

Territorial Generation Companies (ТGCs)

Territorial generation companies (ТGСs) shall become important players in the electric power market. Configuration of ТGСs and the mechanism of their formation with the use of rent scheme, have been approved by OJSC RAO "UES of Russia" Board of Directors on April, 23rd, 2004. It has been decided, that TGСs shall comprise all generating capacities, excluding: those being a part of OGСs; APSs; some power stations, belonging to regional AO-Energos independent from OJSC RAO “UES of Russia”; power stations of isolated power networks; some regional generation companies.

It is supposed, that ТGСs shall be created on the basis of the following principles: formation of large companies; minimization of possibilities for monopoly abuse; joining up of power stations on a territorial principle; decrease of the state control over electric power generation. TGСs will comprise the majority of combined heat-and-power plants (thermal power stations), therefore they will be providing not only electricity, but also heat. Unlike wholesale generation companies formed on the basis of actives, as OJSC RAO “UES of Russia” Holding, so as AO-Energos, ТGСs will be created on the basis of the regional generating companies spun off from AO-Energos, with the subsequent horizontal integration.