Moscow

February 13, 2007

Anatoly Chubais

Chairman of the Management Board

RAO UES of Russia

Energy Industry:Retarding or Driving Force

for Economic Advancement?

2

Economy

Energy Industry

DemandDevelopment Retardation

• Energy Industry: Needs of the Economy

• Energy Industry: Market Reform and Development Strategy

• Energy Industry: Impetus to Economic Sectors

Main sections of this Presentation:

Energy Industry: Retarding or Driving Force for Economic Advancement?

3

Electricity Consumption:Approaching Historical Highs

Source: Forecasted Balance of Electricity and Capacity for 2006-2010 (baseline scenario); RAO UESR estimates

Needs of the Economy

Average annual rate of growth in 2000-2005: 1.7% Average annual rate of growth in 2006: 4.2%

1074992

856828 809

864 878924

1082

984

800

1000

1200

1400

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

1990 level

kWh in billions

4

Peak Load Regions: Exceeding the Electricity Consumption Peak of the Soviet Period

Source: RAO UES of Russia

102 104 105 106108 110 110

115

121124

160

100

110

120

130

140

150

160

170

180

Udmurti

a

Vologda

Karel

ia

Belgoro

d

Kuban

Astra

khan

Lenin

grad

Tyum

en

Kalin

ingra

d

Mosc

ow

Dages

tan

2006 vs. 1990, %

1990 = 100%

Needs of the Economy

5

Source: Resolution of the Russian Government of November 30, 2006; RAO UESR estimates

2006-2010: Changes in Electricity Consumptionand Required New Capacity

For reference: new capacity commissioned in Russia in 1991-2005 – 23.3 GW, maximum annual commissioning of new capacity in Russia in the Soviet period – 8.9 GW (1985)

kWhin billions

984

1,035

1,086

1,134

1,198

900

1,000

1,100

1,200

1,300

2006 2007 2008 2009 2010

Average annual increase in 2006-2010: 5.0%

Change in demand trends

Exhaustion of generation additions using existing capacity

Dramatic growth of demand for new capacity

Revision of Investment Program for the energy industry:from 23.4 GW to 40.9 GW

Needs of the Economy

6

What makes this possible?

Effective demand

Reform of theenergy industry:

turning into a competitive sector

Development strategy: strategy finalization

7

Reform of the Electric Power Industry:National Policy

Nat

ura

lm

on

op

oli

es GOALS:• to reorganize infrastructure for market operations• to ensure nondiscriminatory access to grids

Dispatching

Main grids

Distribution grids

Co

mp

etit

ive

sect

ors

Electricity sales

Generation GOALS:• to create market players• to transfer to market pricing principles

Market rules

Regulated tariffs

Government as regulator

Essence of the reform: separation of monopolistic and competitive sectors

Energy Industry: Reform and Development Strategy

8

RAO UES of Russia: Pre-reform Structure

RussianFederation

MinorityShareholders

of the Parent Company

Generation Grids Sales

73 AO-Energos High VoltageGrids

+Grid

Services

CentralizedDispatching

Administration

32 FederalPower Plants

52% 48%

RAO UES

Energy Industry: Reform and Development Strategy

9

Russian Electric Power Industry: Target Structure

MonopoliesMonopolies Competitive SectorsCompetitive SectorsPrivate shareholders

Government Wholesale Generation

Companies (6)

FGCSystem

Operator

IDC Holding Company

Central North-West

Ural and

Volga

SiberiaHydro WGC (1)

Rosenergoatom

FGC – Federal Grid CompanyIDC – Interregional Distribution Company

Territorial Generation

Companies (14)

Engineering Centers

Sales Companies

CompetitiveMarket

Energy Industry: Reform and Development Strategy

Independent Generation Companies

10

Investment Deployment Concept forthe Electric Power Industry

Reform Concept

Investment Deployment Concept

Investments from the state budget

Competitivesectors

(primarily thermal generation)

Private investments

Monopolistic sectors

Energy Industry: Reform and Development Strategy

11

Investment Mechanisms

Competitive sector(thermal generation, sales, services)

• Revenue from sale of assets

• Investment Guarantee Mechanism

• Loans and advances

• Additional issues of shares in WGCs and TGCs in favor of private investors

• Direct private investments in local projects

Monopolistic sector(grids, dispatching)

• Loans and advances

• Additional issues of shares in FGC, SO, and HydroWGC in favor of the Government

• Funds from the federal budget

• Payment for technical connection to grids

Most investment mechanisms result from theenergy industry reform and market creation

• Own funds

• Revenue from sale of assets

• Own funds

Energy Industry: Reform and Development Strategy

12

180,019

520,452

753,652820,211 825,586

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2006 2007 2008 2009 2010

Investment Program of RAO UES Holding Company: Scope and Mechanisms

Total in 2006-2010:

3,099,920,000,000 rubles

Own funds

Other

Special purpose investments

Long-term projects for expansion of the Investment Program

Funds from external investors for projects under IGM

Federal budget

Revenue from sale of assets

Payment for technical connection

Issue of additional shares

Raised funds

Accumulation fund, accumulated own funds

28.3%

14.7%

12.6%

8.7%

8.4%

7.2%

4.8%

4.5%

1.2%

9.4%

0.2%

rublesin millions

515

30

60

100

Step-by-step increase in the share of electricity sold at nonregulated prices, %

Energy Industry: Reform and Development Strategy

13

Additional Issue of Shares in WGCs and TGCs:Key Mechanism of the Investment Program

RAO UESR Administrative Order No. 914 of December 20, 2006

WGC-1WGC-2WGC-3WGC-4WGC-5WGC-6

TGC-1Mosenergo (TGC-3)TGC-4TGC-5TGC-7TGC-8TGC-9TGC-10Kuzbassenergo (TGC-12)TGC-13

List of companies issuing additional shares:

Companies whose Programs for Preparation and Placement of Additional Shares are approved by the Board of Directors of RAO UES of Russia

Overall assessment of funds raised from additionally issued shares in 2006-2008:

179.5 billion rubles – total for WGCs242.1 billion rubles – total for TGCs

Total:421.6 billion rubles

Energy Industry: Reform and Development Strategy

14

Prospects until 2030:Targeted Vision, General Layout, Investment Programs

2006

2010

2020

2030

General layout of electric power facilities until 2020

Targeted Vision for Development of the Russian Electric Power Industry for the Period Ending 2030

Investment Program of

RAO UES Holding Company for 2006-

2010

5-year investment programsof energy companies

as from 2008

2006 2010 2020 2030

Energy Industry: Reform and Development Strategy

15

Capacity Commissioning Program

MW 2006 2007 2008 2009 2010 2006-2010Thermal generationWGCs, TGCs, RAO UESR

1,196 1,474 1,596 7,576 16,979 28,821

Small TGC HPPs 2 110 161 96 124 493

Hydro WGC 56 696 477 1,548 2152 4,929

Other commissionings 402 771 2,093 2,201 1,190 6,657

Total for Holding Company 1,254 2,280 2,234 9,220 19,255 34,243

Total commissionings, MW 1,656 3,051 4,327 11,421 20,445 40,900

0

5,000

10,000

15,000

20,000

MW

Energy Industry: Reform and Development Strategy

2006 2007 2008 2009 2010

16

2006-2015: Changes in the Fuel Mix

Gas

Coal

179.3

68.9

212

90.6

233.4

143.1

0

50

100

150

200

250

2006 2010 2015

tonnes of fuel equivalentin millions

Gas Fuel oil Coal Other

69%

3%

27%

1%

67%

3%

29%

1%

60%

2%

37%

1%

Energy Industry: Reform and Development Strategy

17

New Technological Structure in the Electric Power Industry

Transmission

Implementation of Flexible AC Transmission Systems (FACTS), new DC transmission technologies (DC Converters),

and high-temperature superconductivity technologies

Grids become an active element of the energy system, with a capacity to change power and energy flows

Grids are a passive element

of the energy system

Generation Efficiency >50%

Efficiency 42-46%

Efficiency 34%

Efficiency 34%

Gas-fired generation: steam-power technology replaced bycombined cycle gas technology (CCGT)

Coal-fired generation: circulating fluidized-bed technology; Implementation, Innovation, and Reconstruction technology;

and super-supercritical technology

Hydropower: active development of pumped storage power plants and tidal power

plants

Radical renovation of data processing technologies based on SCADA-EMS.

Creation of 3-tier technological vertical of dispatching centers

Creation and servicing of the electricity market, system service market, and balancing market

DispatchingMode control through economic motivation of market participants

Mode control using administrative and command

methods

Energy Industry: Reform and Development Strategy

18

RAO UES of Russia Investment Program –Factor for Power Plant Engineering Development

Planned expenses related to purchase of primary thermal power equipmentfor generation facilities of WGCs and TGCs

29.8

96.1

146.3

210.3 212.4

0

50

100

150

200

250

2006 2007 2008 2009 2010

rublesin billions

Total for 2006-2010: 694.9 billion rubles

Purchase orders for construction materials can be placedon the B2B-Energo online trading floor at http://www.b2b-energo.ru

Energy Industry: Impetus to Economic Sectors

19

Factor for Power Plant Engineering Developmentas exemplified by Power Machines

Share of services in portfolio of orders

Generation facilities

Share of exports in portfolio of orders more than 80%

less than 10%

8 GW

2006 2010

40%

15%

17 GW

Sales $0.68 billion $1.5 billion

Corporate Investment Program for 2007-2010: $1 billion

~ 300-400

~ 200

~ 450-500

Key investment sources ($ in millions)

Issue of additional shares in Power Machines

Bonded loans and bank loans

Sale of assets

Energy Industry: Impetus to Economic Sectors

20

… Factor for Electrical Engineering Development

Planned expenses related to purchase of high-voltage equipment and materials forFGC facilities (incl. transmission companies) for 2007-2011

High-voltage equipment Materials

rublesin billions

Total procurement expenses for 2007-2011:

Equipment: 97.5 billion rubles

Materials: 97.2 billion rubles

Energy Industry: Impetus to Economic Sectors

Purchase orders for construction materials can be placedon the B2B-Energo online trading floor at http://www.b2b-energo.ru

8

3,5

19.519.4

0

5

10

15

20

25

2006 2007-2011(average annual)

21

121

136

151 153159

60

80

100

120

140

160

180

2006 2007 2008 2009 2010

tonnesin millions

Coal demand in TPP sector (excl. isolated generating plants) for 2006-2010

Source: RAO UES of Russia

… Factor for Coal Industry Development

Increased annual coal consumption in 2010 as compared with 2006: 38 million tonnes (~31.5%)

Energy Industry: Impetus to Economic Sectors

22

cu min billions

Source: Resolution of the Russian Government of November 30, 2006

• Provision is made that 5-year long-term agreements for transportation of gas from independent producers be signed• As from April 1, 2007: transition to 5-year gas delivery agreements with energy companies.Price guidepost: equal profitability of gas sale both in the domestic market and for export in 2011

… Factor for Gas Industry Development

Gas deliveries to energy companies for 2006-2010

Increased annual gas consumption in 2010 as compared with 2006: 43 billion cu m (30%)

Energy Industry: Impetus to Economic Sectors

143

162.9 166.9174.8

186

50

100

150

200

2006 2007 2008 2009 2010

23

Source: research by Progressor at the request of RAO UES of Russia (preliminary estimates)

… Factor for "Secondary Processing" Development as exemplified by the construction materials sector

tonnesin millions

rublesin billions

Demand for cement of TPPs and HPPs of the Holding Company: new construction and technical upgrading:

7.2 million tonnes

Cement expenses of TPPs and HPPs of the Holding Company: new construction and technical upgrading:

19.2 billion rubles

Energy Industry: Impetus to Economic Sectors

Purchase orders for construction materials can be placedon the B2B-Energo online trading floor at http://www.b2b-energo.ru

0.3

1.8

0

1

2

2006 2007-2010 (annual average)

0.6

4.8

0

2

4

6

2006 2007-2010 (annual average)

24

Source: research by Progressor at the request of RAO UES of Russia (preliminary estimates)

… Factor for R&D and C&I Development

Research and development

(in thermal power industry only):

43.5 billion rubles

Construction and installation

(in thermal power industry only):

265.2 billion rubles

rublesin billions

rublesin billions

Orders for R&D and C&I can be placed on the B2B-Energo online trading floor at http://www.b2b-energo.ru/

Energy Industry: Impetus to Economic Sectors

3.9

10.9

0

4

8

12

2006 2007-2010 (annual average)

10

66.3

0

20

40

60

80

2006 2007-2010 (annual average)

25

Cooperation with the Industry-Related Higher Education Institutions

… Factor for Science and Education Development

March 2006: Agreement for Cooperation signed between RAO UES of Russia and the Russian Academy of Sciences

Development of the Targeted Vision of Development of the Russian Electric Power Industry for the Period Ending 2030

Research to create new competitive equipment for energy companies

Development and mastering of new technologies

Major Areas of Joint Activities

• Recruitment of graduates from higher education institutions• Programs for personnel training, retraining, and advanced training

• Corporate scholarships and contests

Energy Industry: Impetus to Economic Sectors

26

Reform of the electric power industry turns it into a driving force for economic advancement

Economic advancement

Economic retardation

Economy

Electric powerindustry

Demand

Reform of the Electric Power Industry