Energy aspects of the North-European region

Presentation to the Northern Dimension Business Forum by CEO of Unified Energy Systems of Russia and Vice-President of BALTREL Anatoly B. Chubais

4 April 2001 Tallinn

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Northern Dimension — active element of cooperation in the North of Europe

Northern Dimension must make its contribution into the cause of peace and security in the region

Northern Dimension may act as an instrument of complex spatial development of North-Western Russia

Russia

Finland

Poland

Iceland

Estonia

Latvia

Lithuania

Norway

Sweden

Kaliningrad

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Establishment of well-balanced export of electricity - high priority task of RAO UES of Russia

RUSSIAN RUSSIAN FEDERATIONFEDERATION

Kazakhstan andCentral Asia

Baltic states

Belorussia

and

Ukraine

Transcaucasian republics

During Soviet times parallel operation was carried out within 11 USSR republics,4 Central Asian republics were interconnected with each other...

…the decision of RAO UES of Russia restored synchronous operation with 9 of the 12 CIS countries and all the Baltic states - former USSR members

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Finland40%

Belarus

32%

Turkey5%

Poland4%

Latvia 6%

Georgia2% China

1%

Kazakhstan10%

Key markets for electricity deliveries from Russia

Presumptive electricity exports structure for 2001

Total: 15,525 mn kWh

Existing transmission capacity of RAO UES of Russia’s electricity connections with power grids of Latvia and Estonia allows to increase the exports by 3-4 TW per annum

Northern Dimension member countries account for 50% of Russia’s electricity exports

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Exchange between power grids of Baltic countries

Exchange between power grids of Baltic countries in 2000 was 50-55 TWh per annum, in the future will be 65-70 TWh

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2000 future

Russia’s share in the total volume of exchange with Baltic region countries is approximately 12 TWh per annum

12 TWh

38 TWh

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Construction of the third 400 MW transmission line to Finland from the Vyborg transforming plant (Vyborg-Kymi)

Installation of DC connectors allowing export of electricity from the Kola power grid to Finland

Strengthening the 330 kV Lenenergo-Karelenergo-Kolenergo transit transmission line (1100 km)

Final putting into operation of the first stage of the North-Western thermal plant consisting of 2 CCGTs with capacity of 450 MW each

Construction of Kaliningrad No. 2 thermal plant based on the combined cycle technology with capacity of 900 MW

2000 saw continuation of efforts on several investment projects aimed at export expansion

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Conditions and advantages of power grid integration

Conditions

- parallel operation of power grids according to agreed upon rules and technological standards

Advantages

- increase in energy security

- increase in reliability

- possibilities of regulation

- more even and therefore, more economical operation of power grids

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Development of electricity exports from Russia to Western Europe has already begun. . .

Example:Contractual deliveries of electricity to Germany

RAO UES of Russia

Counterparty(Poland)

Counterparty(Germany)Deliveries

(transit via Belorussia)

Contract Contract

Framework agreement

Re-exports

Electricity deliveries to Turkey (transit via Georgia) already started

Patterns of electricity contractual deliveries to Hungary, Yugoslavia and Italy under development

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. . . however the choice of further cooperation pattern determines the necessity of the grid development . . .

. . . However, if the strategic orientation towards parallel operation of power grids is adopted, the DC connectors are not needed

. . . However, if the strategic orientation towards parallel operation of power grids is adopted, the DC connectors are not needed

If it is decided to retain the existing situation it is necessary to develop the back-to-back stations

If it is decided to retain the existing situation it is necessary to develop the back-to-back stations

OUR STRATEGY IS RESTRUCTURING

OUR STRATEGY IS RESTRUCTURING

… and is determined by strategic plans of the partners

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Russian power sector reform implies introduction of competition into generation and supply of power

Generation of power

Supply of power

Segments, where

development of competition is

possible

Natural monopolies

• Introduce free market pricing

• Stop cross-subsidisation

• Reorganise commercial/ technological infrastructure for functioning of power market

• Provide equal access to distribution network

Re-organise the regulatory system

Market rules

Regulated tariffs

Dispatching

High voltage grid

Distribution

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Most countries have chosen a competitive model

Liberalisation

Priv

atis

atio

n

Private

State-owned

State regulation

Competitive market

Russia (2000)

France (2000)

Hungary (1999)

Thailand (1996)

Italy (1999)

California (1995)Great Britain (1990)

Ukraine (1997)

Skandinavia (1992)

EC Directive for Power

sector

Argentina (1990)

Brazil (1995)

South Africa (2000)

Greece (2000)

Kazakhstan (1998)

Moldova (1999)

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Liberalisation of electricity generationand supply through implementationof competition

No constraints for third party access Community-wide

Unbundling and strict regulation of electricity transmission anddistribution systems

Gradual opening of electricity markets over a period of 6 years

Demonopolisation of generation and supply through restructuring of UES’ subsidiaries

Free access to customers

Separation and strict regulation of transmission; separation and regulation of distribution, third party access to the grid

Development of wholesale and retail electricity markets and conditions for private investments

EU Directive’s principles Principles of Russian reform

Basic principles of the Russian power sector reform correspond to key principles of EU Electricity directive (1996)

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In spite of increase in the capex volume...

North-Western Co-Generation Plant

Late in 2000 the first unit of the North-Western Co-Generation Plant was commissioned - first CCGT plant in Russia

Total design capacity of the plant will be 1,800 MW

Its efficiency rate will amount to 51.5%, while at conventional steam plants this rate does not exceed 40%

Fuel consumption per 1 kW of generated power will fall by 20-25%

Construction of the plant is financed by RAO «UES»

In 2000 the amount of RAO «UES» investments in production was 1.4 times as high as it was in 1998 (RUR 34.9 bn against RUR 24.3 bn).

RUR 24.3 bn

RUR 34.9 bn

RUR 28.7 bn

823.9 MW

1,116 MW

836.5 MW

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In particular, investments are needed for construction of units 3 and 4 of the North-Western Co-Generation Plant, Kaliningrad

Co-Generation Plant-2

…internal resources are not sufficient to solve the key problem

Assets of RAO «UES» have highly deteriorated

Over the last 15 years virtually no large power projects have

been commissioned

Annual retirement of capacities is 5 times as high as the

introduction of new ones

Annual amount of investments is 5-6 times lower than

required

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«5,000 MW» Program: First stage of an investment breakthrough

Under the «5,000 MW» Program the capacities to be put in operation will provide for gas savings of up to 6.6 bn cub. nm per annum

Corresponding budgeted investments will amount to US$ 1,737.4 mn

Deadline for completion of pre-feasibility studies under the Program – 30 April 2001

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Negotiations about possible attraction of investments are currently underway with largest international companies

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30 largest electricity companies of the world by market capitalisationUS$ bn

Companies, with whom meetings have already been held

Second-tier strategic investors, with whom meetings are planned

On behalf of RAO UES of Russia the negotiations with 9 large electricity companies have been held, additional meetings are planned

*approximately, based on the expert estimates

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Reform will open up new horizons for international co-operation in power sector

Investment opportunities in generation

Strengthening of European

electricity security

Asset swaps betweenRussian and Europeancompanies

New markets for power sector technologies

Expanded exportand import

of electricity

Russian power sector reform

THANK YOU FOR YOUR ATTENTION