Russian power generation needs foreign investment

MOSCOW. (RIA Novosti economic commentator Vasily Zubkov) - The rapid economic growth which began in Russia several years ago has led to an exponential rise in the demand for electricity. Some Russian regions, including Moscow and its suburbs, as well as regions in European Russia, the Urals and Western Siberia, are facing power shortages.

Electricity demand is expected to grow in Russia by 5.2% in 2008 (10% in some regions). Funds, including foreign investment, are crucial for satisfying it.

The shortage of electricity could hinder Russia's accelerated economic growth. Therefore, the privatization of power plants (with the exception of hydropower and nuclear power plants) will be complemented by an impressive program for prolonging their working life. This plan will increase generating capacities by 41 GW by 2010 and 180 GW by 2020, compared with 209 GW now.

That challenging program cannot be fulfilled without financial injections, including by foreign investors. There are three reasons for growing investment in the Russian power industry.

The first reason is a clearly articulated desire on the part of the Russian authorities to use foreign funds to develop the sector. During the recent 11th International Economic Forum held in St. Petersburg, President Vladimir Putin said the capacities of the national power generating infrastructure should be increased by more than 50% in the next 10 years, adding: "We expect foreign investors to contribute to it."

When the president lobbies for an idea, potential investors view this as the best possible guarantee. A clear schedule for the liberalization of the electricity market has been drawn up to create transparent conditions for foreign and local investors. This will increase the sector's profitability, a crucial factor for investors.

The second reason is the mind-boggling size of potential investment, to which the state and private Russian companies will contribute. The national development program for the generating sector until 2010 calls for raising $115 billion.

According to Russian electricity monopoly RAO UES, $30 billion will be invested in the sector in 2008, including $3.2 billion from the federal budget. The company said that aggregate investment had soared from $2 billion in 2005 to $20 billion in 2006.

Andrei Dementyev, deputy minister of industry and energy, said some $20 billion of investment in 2008 would be channeled into six wholesale generating companies (OGK) and 14 territorial generating companies (TGK) privatized as part of the UES reform. They will raise capital through an initial public offering.

The third reason is that conditions are becoming more comfortable for business in Russia, which explains the unprecedented growth of foreign investment. In January-May 2007, foreign companies invested $65 billion in the Russian economy. If the figure reaches $100 billion by the end of the year, Russia will surge ahead of China in this measure.

The St. Petersburg forum, which was attended by delegates from 500 major companies (220 of them represented by presidents and chairmen of the board), was a vivid proof of growing investment interest in Russia. Investment agreements exceeding $13.5 billion were signed during the forum, including $4 billion worth of foreign direct investment.

These are sufficient reasons for focusing on the Russian power-generating sector. UES experts said several global energy giants are ready to invest in Russia, notably Finland's Fortum, Italy's Enel, Germany's E.ON, Spain's Endesa, France's Electricite de France, and America's AES.

Many of them are already working in Russia. Enel was the first to arrive, and has been managing the Northwest Thermal Power Plant jointly with Russian company ESN since 2004. This is a unique case in the Russian power industry.

E.ON has also earned a good reputation in Russia. It has recently signed an agreement with the government of Siberia's Tyumen Region to build a gas turbine power plant with a capacity of 3,000 MW in Tyumen. Investment in the project will exceed $1 billion. The German energy giant has also announced its intention to buy major stakes in OGK-1, OGK-4 and TGK-3. Fortum is not a newcomer either; it has a blocking stake in TGK-1.

Other European and American companies mentioned above have also hinted at their interest in the Russian electricity sector. An executive at Enel said foreign companies could invest up to $15 billion in the next few years.

Unfortunately, foreign investment is kept back by legal restrictions. Russian law does not allow foreign companies to own more than 50% of territorial generating companies, which must be state-controlled.

Since this rule does not apply to wholesale generating companies, Enel, which recently bought a blocking stake in OGK-5 during its IPO, may increase it to a controlling stake.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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