Translated material
The state remains
Less than a third of Russian energy generation will be available to independent investors
The intensification of processes relatedto the reform of RAO UES allows experts with a high degree of probability to predict its results and draw conclusions. The Energy Policy Institute (IEP) in its analytical note “Possible future ownership structure of generating capacities in the Russian electric power industry and its impact on the conditions of competition” concludes: the goals of the reform in the form of creating a competitive market and the state’s exit from the generation sector will not be achieved.The IEP forecast is based on a number of assumptions about the outcome of future sales. In particular, it is assumed that Gazprom will most likely become the owner of OGK-5, OGK-6 and OGK-2; Norilsk Nickel will gain control in OGK-3 , and Surgutneftegaz - in OGK-4; control over TGK-8 will pass to LUKOIL, and SUEK will be able to establish control over TGK-12, TGK-13 and TGK-14, as well as the capacities of the Omsk Generating Company, part of TGK-11. At the same time, a number of capacities will remain under the control of the existing owners - the state (nuclear and hydro-generating capacities) and the Basic Element company (Irkutskenergo, Krasnoyarsk HPP). Assumptions about the future owners of OGK-1, as well as TGK-1, 2, 4, 5, 6, 7, 9 and 10 were not made as part of the analysis, since, as the report says, it is implied that they will be able to become their owners (but not necessarily will become) independent investors, not affiliated with any of the other owners identified during the analysis.
Of course, trading may not confirm such specific expectations, as, for example, recently happened with the placement of an additional share issue of OGK-3, which, instead of the “planned” Gazprom group, was bought by the “unplanned” Norilsk Nickel. And the strategy for action in the electric power industry, recently approved by the board of Gazprom, involves, in addition to consolidating a controlling stake in TGK-3, the purchase of shares in OGK-2, OGK-6, TGK-1 and TGK-7. However, even such details fit well into the basic scenario described in the IEP analysis. This scenario assumes that the Russian energy generation capacity will be mainly distributed between the state, Gazprom and five large private industrial groups - Basic Element, SUEK, Norilsk Nickel, Surgutneftegaz and LUKOIL.
In none of the six united energy systems of Russia will it be possible to create conditions under which owners independent of the state, Gazprom and five large industrial groups would own at least half of the generating capacity, IEP experts conclude. At the same time, the total and virtually irreducible share of the state in generation (thanks to nuclear and hydropower) will be 24.1%. And the combined share of the state, Gazprom and five private corporations in all Russian generation will be more than 70%. Assessing the potential effect on the quality of competition in the future market, IEP experts come to disappointing conclusions.
“In any case, the arrival of a private owner is better than maintaining the current status quo. However, the reform had two goals: the creation of a competitive market and the exit of the state from generation. The situation is such that the market will continue to feel the presence of the state. And it will be interested in creating special conditions for affiliated players,” says Vladimir Milov, president of the institute.
To create competition, it is not enough to simply let prices go, Mr. Milov emphasizes; the market structure must also ensure competition. He notes that the authors of the reform successfully coped with one part of this task when forming the very composition of generating companies (the WGC configuration is such that the power plants included in each company are dispersed throughout the country in order to prevent monopolism in a particular region). “But the second point is the ownership structure. Our situation is a direct path to oligopolies,” says the IEP president.
The report describes the threats inherent in such a scenario as follows: “Given that the future owners of generating capacities have developed related businesses that require electric power capacities as a market for fuel sales or a source of electricity to supply energy-intensive industries, there is a high probability that large industrial generation owners will not be interested in having a single wholesale electricity market and, on the contrary, will be interested in its fragmentation in order to gain the opportunity to prioritize the use of generating capacities at their own discretion, to meet their own electricity needs or implement regional strategies for the development of sales markets for the produced electricity.”
This situation is not Russian know-how. The UK, which reformed its energy sector at the turn of the 1980s and 1990s, faced precisely these problems. After the privatization of the sector, two major players appeared on the market - National Power and PowerGen, and prices were not regulated by the state. This eventually led to a sharp rise in energy prices in 1993. The authorities had to actively intervene: corporations were ordered to sell part of their generating capacity, a maximum level of energy prices was set for a two-year period, and in 1995 they even adopted regulations that impeded the process of vertical integration that had begun.
The IEP report provides a list of measures that would help avoid stepping on the “rake.” In particular, this list includes ensuring conditions for the real entry of international investors into the Russian energy sector, the unbundling of HydroOGK, and limiting participation in auctions for the sale of generating companies for owners who control generation over 5 MW. There are also specific, very “painful” proposals: to prohibit the purchase of generating capacities by large energy and fuel companies (primarily Gazprom and SUEK), to prevent Gazprom from purchasing a controlling stake in OGK-1 and to oblige it to sell a controlling stake in Mosenergo.
However, it is obvious that such steps are absolutely contrary to the current situation and are unacceptable for the authorities. Understanding this, IEP experts conclude: “In fact, a de facto non-competitive electricity market is already emerging in Russia, mainly controlled by several large industrial groups, without a significant presence of foreign and institutional investors and with a significant presence of the state.”
The fact that the Russian energy sector will actually be “free” from foreign strategic investors is probably the most unexpected result of the reform, and primarily for its authors. As you know, the largest European concerns were “in line” - the German E.ON, the Italian Enel, the Finnish Fortum. The first negotiated for a long time (according to unofficial data, laying claim to Mosenergo) and has not yet achieved a result. Enel only entered the sales business in partnership with entrepreneur Grigory Berezkin. Fortum, which owns a blocking stake in TGK-1, has achieved the greatest success. However, the Finns’ plans to receive a controlling stake in the St. Petersburg company as a result of an additional share issue apparently were not destined to come true: they were “signaled” that TGK-1 has a “metropolitan character” and therefore they will not give control to foreigners.
“There will be no foreigners in the market; there will be no one to challenge the Russian oligarchic groups,” says Vladimir Milov. But he sees the main evil not even in the national character of investors, but in the dominant position of two owners - the state and Gazprom. “In conditions when half of the capacity is with them, the oligarchs become subordinate and will clearly coordinate their actions with them,” he says.
However, initiatives from private generation owners, according to IEP, are easily predicted. Since RAO UES, which will disappear in the middle of next year, has been the guarantor of the country's unified wholesale electricity market in recent years, “it is possible that in a short time after this, large owners of generating capacities, owning half of the capacity on the market and the main first-class capacities, will turn to the authorities with proposals to liquidate the wholesale electricity market, which operates according to uniform rules, and fragment it into a regionalized electricity trading system that is more comfortable for large industrial owners (including a possible reduction in the size of the wholesale electricity market to a “surplus market”).”
Future owners, Vladimir Milov believes, will also bury the large-scale investment plans that RAO UES now wants to leave them as a legacy. “Of course, the new owners will reconsider these plans. There is still no mechanism for monitoring the implementation of the investment program, and given the political weight of the new owners, they will succeed, says the head of the institute. “In addition, we can somewhat agree with those who consider these plans to be premature and, perhaps, not of very high quality.”
The “Market Council,” which is proposed to be formed as a kind of self-regulatory organization, according to Mr. Milov, will not a priori fill the regulatory vacuum: “RAO very actively and effectively regulated processes in the industry precisely because of the presence of a corporate vertical. In particular, the company could, using administrative mechanisms, resolve conflict situations in the market. The Market Council will not have such opportunities. Its strength and potential will be inversely proportional to the strength and potential of the market participants themselves.”
Possible ownership structure of generating capacities after the sale of OGK and part of TG, %
| State | 28.7 | 30.8 | 37.6 | 53.3 | 5.7 | 15.7 | 24.1 |
| Gazprom | 34.0 | 12.5 | 35.9 | - | 29.3 | 2.7 | 20.0 |
| State + Gazprom | 62.7 | 43.3 | 73.5 | 53.3 | 35.0 | 18.4 | 44.1 |
| "Basel" | - | - | - | - | - | 41.4 | 10.3 |
| SUEK | - | - | - | - | - | 19.9 | 4.9 |
| "Norilsk Nickel" | 10.3 | 5.5 | - | - | 2.4 | 3.3 | 4.6 |
| "Surgutneftegaz" | 3.5 | - | - | - | 14.6 | 3.3 | 4.7 |
| LUKOIL | - | - | 22.3 | - | - | - | 1.9 |
| Other owners | 23.4 | 51.3 | 4.2 | 46.7 | 48.1 | 13.7 | 29.4 |