December 10, 2019, 00:51 / Business

20 years of electric power industry in Russia - from RAO UES of Russia to market liberalization

Russian economy 1999–2019. Special project of Vedomosti and Expert RA Elena Vavina Liberalization of the electric power industry did not affect the entire country / ROSSETI

In 2005, due to an accident at the Chagino substation, about 5 million people were left without electricity. People got stuck in elevators, metro trains stopped, huge industrial enterprises froze in silence, windows in shops, office centers and multi-storey buildings went out - Moscow plunged into darkness, district after district. The cause of the accident was stated to be personnel errors and extreme, up to 90%, wear and tear of equipment. At the turn of the 1990s–2000s. Power outages were almost commonplace and did not only occur as a result of accidents. A conscious, albeit forced, measure was rolling blackouts, when power engineers had to turn off consumers in entire areas due to a lack of fuel to maintain equipment in working condition. The industry needed reform.

Anti-crisis measures

The debts of energy workers to coal and gas suppliers became a real threat to the passage of the autumn-winter period of 1998–1999. There was nothing to buy fuel with. By this time, the total volume of payments to energy companies was about 85%, with the bulk of them carried out by barter, bills and offsets. Real money accounted for only 20% of all payments. The debts of industrial consumers to regional energy companies exceeded 2–3 years of their sales volume. Ordinary power engineers went on mass strikes and hunger strikes, some of them were not paid salaries for six months. At the same time, in 1999 in the country for the first time since the late 1980s. electricity consumption began to increase.

The huge machine of the Russian energy system was malfunctioning. It was managed by the Russian joint-stock company “Unified Energy System of Russia” (RAO “UES of Russia”). The company owned 72% of all generating capacity and about 96% of electrical networks, dispatch control and sales. Electricity tariffs were determined by regional energy commissions based on the costs of regional energy companies owned by the UES. Most of them were unprofitable, and by the end of the decade, 20 regional power systems and federal power plants were going through bankruptcy proceedings. The industry needed reform and investment.

In 2000, the board of RAO UES adopted a resolution “On measures to eliminate the practice of rolling blackouts,” prohibiting the disconnection of bona fide consumers. At the same time, the practice of disconnecting non-paying customers from electricity was introduced. This caused resistance from large businesses, not accustomed to paying for electricity, and from a number of governors. By 2001, it was possible to eliminate the barter system.

Reform of RAO UES

Eliminating the problem of non-payments did not allow solving the main task of attracting investment to the industry. To achieve this, the board of RAO UES decided to reform the entire system with a transition to market mechanisms. Essentially, the reform consisted of dividing the entire system into natural monopoly (electricity transmission) and competitive (electricity generation and sales) activities. The state transferred generation and sales to private hands, while maintaining control over the networks and the dispatcher. And also over nuclear and hydropower plants. Power plants were able to sell electricity at free prices on the spot market or under direct contracts.

The reform was opposed by almost all governors, all political parties in the State Duma, with the exception of the Union of Right Forces, the Federation Council, large industrial consumers, criminals who actually controlled part of the energy system, a significant part of energy scientists, minority shareholders of RAO UES and the management of the holding's subsidiaries, and it was possible to resist all of them only with consistent support from the state, says the chairman of the board of RAO UES of Russia in 1998–2008. Anatoly Chubais (now Chairman of the Board of Management Company Rusnano): “I remember well one conversation, another difficult battle at a meeting between President Vladimir Putin and a group of governors who categorically resisted reform, led by Yuri Luzhkov. Our opponents said that transformations should not be carried out under any circumstances. This is the collapse, the destruction of the unified energy system. And in general, says Yuri Mikhailovich, who will manage the electric power industry? In response, a quiet voice from someone present is heard, uttering one word: “Market.” Everyone looks around: who said that? Oh, Putin said that.”

The sale of assets of RAO UES of Russia began in 2006 with the purchase of control over OGK-3 by Norilsk Nickel. The largest buyer of Russian generation was Gazprom , which received control in OGK-2 , OGK-6, Mosenergo and TGK-1 , as well as shares in TGK-11, TGK-12 and TGK-13. IES Holding of Viktor Vekselberg acquired TGK-5, TGK-6, TGK-7 and TGK-9. SUEK Andrey Melnichenko bought TGK-12 and TGK-13. came into the energy sector Lukoil (TGK-8), Mikhail Prokhorov's Onexim (TGK-4), the Sintez group (TGK-2), Russian Railways together with Grigory Berezkin's unified social tax (TGK-14) . Foreign investors also became interested in Russian energy: Italian Enel bought control in OGK-5 , German concern E.On AG bought control in OGK-4 , Finnish Fortum bought TGK-10.

Trunk networks with voltages from 220 kV came under the control of the Federal Grid Company. Distribution networks became part of IDGC Holding. Later, both holdings merged to form Rosseti.

95% of the time working on the reform there was a total feeling that it was impossible to do it, says Chubais: “In 2007, I talked with my friend, a major businessman. I convinced him that we had half a step left to attract big money into the energy sector. To which he replied that this was absolutely frivolous: “What money? Tens of billions are needed. You might sell a couple of stations. But you’d better think about how you’re going to get out of this.” In 2008, we attracted 1 trillion rubles and $30 billion of investments into the Russian energy sector. And pay attention: all the private investors who came into the industry then are still there.”

Time to invest

In July 2008, RAO UES of Russia was liquidated. The United Energy Company split into 23 independent generating companies. However, energy transformations have only just begun. The new owners had to invest in the construction of generating capacities.

The development of the industry was determined by the General Scheme for the placement of energy capacities until 2020. And its implementation was to be guaranteed by capacity supply agreements (CSA), mandatory for investors. By acquiring control in generating companies, investors received obligations to build a certain number of new generating capacities within a specified period. The agreements guaranteed them a return on investment through increased consumer payments, but if the commissioning deadlines were violated, investors faced fines.

Nuclear and hydropower plants, as well as stations using renewable energy sources (RES), were built using a similar mechanism. In total, after the end of the reform in 2008–2018. In Russia, about 43 GW of new capacity was commissioned. In 2019, the government approved a new CSA program aimed at modernizing existing thermal power plants (TPPs) - about 41 GW more until 2031.

Electric networks, as a natural monopoly activity, remained under state control: 90% of the main and 75% of distribution networks belong to the Rosseti company (85.31% belongs to the Federal Property Management Agency). Both Rosseti and independent territorial grid companies transmit electricity at tariffs determined by regional authorities. Since 2011, tariffs have been set using the return on invested capital method, which allows networks to plan investments and raise money with guarantees of future revenue.

The market has not appeared everywhere

But liberalization of the electricity sector did not affect the entire country. In remote regions with isolated power supply systems and where there are weak network connections with the unified power system (Far East, Komi Republic, Arkhangelsk and Kaliningrad regions), the tariff system is still in effect.

The market has not reached the population either - Russian residents still pay for electricity at regulated tariffs, which do not cover all the costs of energy production and delivery. The difference included in electricity transmission tariffs is paid by all other consumers connected to distribution networks, primarily energy-intensive industrial enterprises. According to FAS estimates, in 2018 cross-subsidies in power grids amounted to 220 billion rubles. Officials proposed reducing subsidies to the population through the introduction of a social norm so that electricity consumption above a certain amount would be paid at an economically justified price. The government tried to introduce this measure twice – in 2015 and 2018, but it was never implemented.

Also, industrial consumers in the European part of Russia, the Urals and Siberia are paying for the leveling of the tariff to the national average in the Far East, where the electricity market was never launched, and the construction of new stations in Crimea and the Kaliningrad region. In 2019, the Ministry of Economic Development estimated the total amount of all types of cross-subsidies at 402 billion rubles. per year (up to 25% in the price of electricity).

Industrial consumers also call all forms of CSA non-market - they oblige businesses to pay not only for the construction and modernization of facilities, but also for the guaranteed return of investors. In 2018, payments under such agreements cost them about 430 billion rubles. According to the Energy Consumers Community, the first CSA program cost businesses a total of RUB 3 trillion. The new program will cost about another 8 billion rubles. until 2046

According to market principles, based on supply and demand, only 15–20% of the final price of electricity is formed in the Russian energy sector, said Alexander Starchenko, Chairman of the Supervisory Board of the Community of Energy Consumers (in 1998–2002, Director of the Capital Management Department of RAO UES of Russia). : “All this was to build a market worth 15% of energy consumption? It seems to me that the result is not proportional to the effort expended.”

Starchenko agrees that the reform was necessary, but it also needed to be completed - to eliminate cross-subsidies and develop real competition: “Initially it was assumed that regional energy monopolies would be divided into many small and medium-sized companies, which could then, under the influence of market factors, merge into larger ones. In fact, we have more than half of state-owned generation and a complete lack of incentives for real modernization for participants in the process.”

Future of Energy

While other countries are restructuring the energy sector, making it more distributed to reduce energy costs, the new program for modernizing thermal power plants cements the aging structure of the Russian energy sector and fixes its technological lag for the next twenty years, Starchenko believes: “If you look at the projects that are being selected, These are, as a rule, current and major repairs, not modernization. The first selection projects do not include gas turbines. Although in the world energy sector even a gas turbine is already a technology of the last century.”

“If you look at all the programs and decisions made, it seems that the picture of the development of Russian energy has already taken shape,” says Alexey Khokhlov, head of the Electric Power Department at the Energy Center at the Skolkovo Moscow School of Management . There is a decision that the increase in the price of electricity for industrial consumers should not exceed inflation; this creates an upper limit for investment resources, which is divided between various programs: modernization of thermal power plants, support for renewable energy sources, construction of new nuclear power plants. At the same time, the global energy industry is rapidly changing: distributed generation, demand management, renewable energy are developing - the system is changing both in terms of market conditions and in terms of technological content and appearance, says Khokhlov: “We are frozen in traditional energy and continue to tighten up the same steam turbines. We are investing enormous resources in the reproduction of the old-style electric power industry. This system is inflexible, conservative and largely outdated; it no longer meets the requirements and expectations of consumers.”

In Russia, renewable energy is built under CSA. By 2024, about 5.4 GW should be available under this program. The government is discussing extending the program until 2035 with an investment of 400 billion rubles. for 11 years. This will make it possible to build at least 7 GW of green capacity, says Chubais: “This is the minimum that is necessary so that the process of development of renewable energy in Russia does not stop.”