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Investment in Russia: Super Power Opportunities

The Russian power sector is priming itself for outside financial and infrastructure investment. By Branko Terzic and James Balaschak
Fortnightly Magazine - February 1 2003

the 21st century.

The restructuring of the the Russian power sector is planned in three stages lasting from 2003 to 2008.

The First Stage of Power Sector Reform (2002-2004):

  • Preparing and adopting essential legal and statutory acts (the electricity bill and four companion bills currently under review by the Duma) regulating activity in the power sector under market conditions, including the development of rules governing the functioning of a competitive wholesale power market, and the creation of mechanisms for equal access to the grid infrastructure for market participants;
  • Creating a single vertical system regulating monopolistic activity in the sector;
  • Beginning RAO UES restructuring by separating the federal grid company (future owner of all backbone transmission lines), the system operator (which will perform all the commercial dispatch functions) and nine to 10 large generating companies from the main structure;
  • Forming a single generating company, consisting of 10 nuclear power plants;
  • Setting up the Trade System Administrator as a non-profit organization, founded by the main participants of the emerging wholesale power market;
  • Organizing a settlement system for the power supply market;
  • Transitioning electric power retailers to a commercial dispatch system appropriate to their needs and requirements; and
  • Setting up a single nuclear generating company on the basis of 10 nuclear power plants.

The new grid operator, JSC System Operator-Central Dispatch, was established in May 2002 as a 100 percent subsidiary of UES with a board made up of UES, government, and minority shareholder representatives. The operator will establish seven regional branches. Full unbundling is scheduled for 2004.

As early as the first stage of reforms, up to 15 percent of the generated electric power will be sold on the free market at prices regulated by the market.

Introducing the Second Stage of Reform (2004-2006):

  • Introducing rules governing the competitive wholesale power market, definition of procedures for interaction between participants;
  • Creating independent supply companies;
  • Uniting the federal grid company with the system operator (if expedient).
  • By the end of the second stage of reform, all electricity generated must be sold on the competitive wholesale market. The state regulation of tariffs for electric power generation and sales will end. The state will only regulate monopolistic activities-including the transmission of electricity via backbone transmission lines and commercial dispatch.

    The Third Stage of Reform (2006-2008)

    The third stage, which completes the restructuring, is key in terms of providing investment opportunities for the Russian power industry. At this stage, all conditions, both economic and organizational, must be created, to attract investment by way of large-scale sale of shares in generating companies and in other companies performing competitive activities. There also will be an increase of the state share in companies performing monopolistic activities-the federal grid company and system operator.

    Wholesale Generating Companies: The New Players

    Wholesale generating companies, emerging as a result of RAO UES restructuring, are due to become the target for investment in the long term. As many as 11 generating companies are planned: six owning thermal power plants, four that exclusively operate hydroelectric power stations, and one nuclear power station operator. RAO UES has submitted to