Power Russia report 2013

1

RussiaPower reportJuly 2013

2

Acknowledgements

Focus Reports would like to thank all individuals, institutions and companies involved in producing this report.

Special thanks goes to:

State Duma Energy CommitteeFederal Tariff Service

Federal Antimonopoly ServiceNP Market Council

Moscow OblastFederal Grid Company

Inter RAO UESGazprom Energoholding

RosatomRushydro

Council of Power ConsumersCouncil of Power Producers

Council of Guaranteeing Suppliers & RetailersNP Hydropower

Skolkovo Energy CenterUS-Russia Business Council

Association of European BusinessesWho showed us their particularly strong support and interest throughout

our project. We highly appreciate the time they dedicated to share their invaluable insights with our staff.

3

This sponsored supplement was produced by Focus Reports.Project director: Koen Liekens Project coordinators: Merlin Ozkan and Solène PignetProject publisher: Ines Nandin

CopyrightAll rights reserved. No part of this publication maybe reproduced in any form or by any means, whether electronic, mechanical or otherwise including photocopying, recording or any information storage or retrieval system without prior written consent of Focus Reports.While every attempt is made to ensure the accuracy of the information contained in this report, neither Focus Reports nor the authors accept any liabilities for errors and omissions. Opinions expressed in this report are not necessarily those of the authors.

CONTENTS

INTERVIEWS

2 ACKNOWLEDGEMENTS

4 POWERING MODERN RUSSIA

8 STARTING SMALL IN A BIG COUNTRY

9 MEGALOMANIA, BUT THE GOOD KIND

11 HIGH-PROFILE DOMESTIC HYDROPOWER PROJECTS

12 BUILDING THE NEXT GENERATION

13 RAMPING UP FOR THE NUCLEAR RENAISSANCE

14 INTERVIEW WITH: Dmitry Govorov, director – Association of Power Consumers

16 INTERVIEW WITH: Igor Mironov, CEO – Council of Power Producers

18 INTERVIEW WITH: Nikolai Alekseevich Karasev, president – Forenergo

20 INTERVIEW WITH: Dr Alexei Sivderski, CEO – Interautomatika AG

22 INTERVIEW WITH: Olga Dolgova, general director & Alexander Karpov, first deputy – KomplektEnergo

24 INTERVIEW WITH: Aleksandr Evgenevich Yushin, general director – ORGRES

26 INTERVIEW WITH: Alena Rybushkina,chairwoman – NP HYDROPOWER

28 INTERVIEW WITH: Jack Neushloss, head of the electric power sector – Skolkovo Business School Energy Centre

30 INTERVIEW WITH: Ed Verona, president and CEO – Us-Russia Business Council

32 INTERVIEW WITH: Igor Vladimirovich Kotov, general director – Zio-Podolsk & Ziomar

34 INTERVIEW WITH: Evgeny Dod, Chairman of the Board - RusHydro

36 INTERVIEW WITH: Kirill Komarov, Deputy General Director Global Business Development - Rosatom

38 INTERVIEW WITH: Sergey Novikov, Head - Federal Tariff Service

40 INTERVIEW WITH: Yury V. SHAROV, Member of the Management Board – Head of Unit INTER RAO UES – Engineering Unit

42 INTERVIEW WITH: Denis Fedorov, General Director - Gazprom energoholding

4 Russia energy report July 2013

110 Power Engineering International May 2013 www.PowerEngineeringInt.com

This sponsored supplement was produced by Focus Reports. Project director: Koen Liekens

Project coordinators: Merlin Ozkan and Solène PignetProject publisher: Ines Nandin

For exclusive interviews and more information, please visit www.focusreports.net or email [email protected]

POWERING MODERN RUSSIA

Special Country Report

When a geographic

region covers about

one-eighth of the

world’s land surface,

the term ‘country’

takes on a whole new

meaning. Stretching from Kaliningrad to Big

Diomede Island in the Bering Strait, the territory

of Russia is blessed with an abundance of

natural resources. They have granted Russia

the status of global energy giant.

The vast amounts of coal, oil and gas

in particular have traditionally provided

Russia’s heavily industrialized economy

with the comparative advantage of cheap

energy. Powered by this cheap electricity, the

economy regained traction after a transitional

decade of decline in the 1990s.

With the World Bank forecasting GDP

growth of 3–4 per cent in the coming years,

Russia’s outlook is stable and promising. But in

spite of the abundance of natural resources,

its policy makers struggle to define a model

that will both sustain affordable energy and

attract investments into its ageing power

sector. The sector’s various stakeholders now

have the common goal of coming up with a

harmonious model to power modern Russia.

Created during Soviet times as the

backbone of a planned industry-oriented

economy, the majority of electricity assets of

Russia’s unified electric energy system were

transferred into the open joint-stock company

Unified Energy System of Russia (RAO-UES)

by the new government of the Russian

Federation in 1992.

When Anatoly Chubais was appointed

president of RAO-UES in 1998, he was tasked

with what would subsequently be recognised

as one of the most ambitious reform processes

ever undertaken. Launched in 2001, the large-

scale reform of the electric power sector was

aimed at increasing private ownership by 2008,

ensuring price liberalisation and full competition

in power generation by 2011, and granting third

party access to network infrastructure.

While the government has retained control

of the power grid, its dispatching system, the

nuclear sector and most of the hydroelectric

power plants, the inflow of investors in the

generation niche resulted in a significant

increase in capacity.

Russian oligarchs, together with three

European utilities – Germany’s E.ON, Enel

of Italy and Finnish Fortum – were allowed

to enter the market on the condition that

they would invest in new capacity and

plant modernization. They were welcomed

by a government incentive plan, known as

Capacity Supply Agreements (CSA), and a

promise of attractive returns on investment

(ROI) through the deregulation of electricity

tariffs. However, the subsequent price hike

has resulted in additional pressure on the

country’s industrialists – the highest consumers

of energy. Tasked with keeping these industries

The 400 MW Yaivinskaya CCGT plantreaches efficiencies of 56.6 per cent

Credit: E.ON Russia

1305_PEI_P110_P119_RUSSIA.indd 110 23/05/2013 09:20

5


This sponsored supplement was produced by Focus Reports. Project director: Koen Liekens

Project coordinators: Merlin Ozkan and Solène PignetProject publisher: Ines Nandin

For exclusive interviews and more information, please visit www.focusreports.net or email [email protected]

POWERING MODERN RUSSIA

Special Country Report

When a geographic

region covers about

one-eighth of the

world’s land surface,

the term ‘country’

takes on a whole new

meaning. Stretching from Kaliningrad to Big

Diomede Island in the Bering Strait, the territory

of Russia is blessed with an abundance of

natural resources. They have granted Russia

the status of global energy giant.

The vast amounts of coal, oil and gas

in particular have traditionally provided

Russia’s heavily industrialized economy

with the comparative advantage of cheap

energy. Powered by this cheap electricity, the

economy regained traction after a transitional

decade of decline in the 1990s.

With the World Bank forecasting GDP

growth of 3–4 per cent in the coming years,

Russia’s outlook is stable and promising. But in

spite of the abundance of natural resources,

its policy makers struggle to define a model

that will both sustain affordable energy and

attract investments into its ageing power

sector. The sector’s various stakeholders now

have the common goal of coming up with a

harmonious model to power modern Russia.

Created during Soviet times as the

backbone of a planned industry-oriented

economy, the majority of electricity assets of

Russia’s unified electric energy system were

transferred into the open joint-stock company

Unified Energy System of Russia (RAO-UES)

by the new government of the Russian

Federation in 1992.

When Anatoly Chubais was appointed

president of RAO-UES in 1998, he was tasked

with what would subsequently be recognised

as one of the most ambitious reform processes

ever undertaken. Launched in 2001, the large-

scale reform of the electric power sector was

aimed at increasing private ownership by 2008,

ensuring price liberalisation and full competition

in power generation by 2011, and granting third

party access to network infrastructure.

While the government has retained control

of the power grid, its dispatching system, the

nuclear sector and most of the hydroelectric

power plants, the inflow of investors in the

generation niche resulted in a significant

increase in capacity.

Russian oligarchs, together with three

European utilities – Germany’s E.ON, Enel

of Italy and Finnish Fortum – were allowed

to enter the market on the condition that

they would invest in new capacity and

plant modernization. They were welcomed

by a government incentive plan, known as

Capacity Supply Agreements (CSA), and a

promise of attractive returns on investment

(ROI) through the deregulation of electricity

tariffs. However, the subsequent price hike

has resulted in additional pressure on the

country’s industrialists – the highest consumers

of energy. Tasked with keeping these industries

The 400 MW Yaivinskaya CCGT plantreaches efficiencies of 56.6 per cent

Credit: E.ON Russia

1305_PEI_P110_P119_RUSSIA.indd 110 23/05/2013 09:20 1305_PEI_P110_P119_RUSSIA.indd 111 23/05/2013 09:20

6


Russia

cost-competitive, Russian policy makers have

a significant task ahead them.

A second wave of reforms?“The most important aspect is to find a

balance between the interests of the

investors and the consumers of electricity,”

says Sergey Novikov, head of the Federal

Tariff Service. When asked about the recent

increase in electricity tariffs, Novikov reflects

on the period 2010–11 when the decisions of

the regional regulatory authorities, which are

independent of the Federal Tariff Service, led

to a hike in tariffs.

Commenting on the impact on small to

medium-sized businesses, Novikov recalls that

“they saw their prices increasing abruptly,

by 30–50 per cent, urging us to adjust the

regulatory framework.

“Today we also have the very important

task of protecting investors. Apart from finding

the right balance, we therefore also need to

make the right decisions. Capital structures

need to be balanced out so that financing

can come from tariffs, the budget or from

investments,” he concludes.

Although the CSA model is approaching

its natural end, generating companies remain

puzzled over what will replace it. While still

profitable today, generation companies in

Russia are anxiously waiting for further reform

of the power sector to justify their much-

needed investments in the modernization

of their facilities. On example is Gazprom

Energoholding. With its 80 power plants

totalling over 37 GW, it is the largest generator

in Russia and one of the top-ten worldwide.

Without further reforms, however, the company,

which is majority state-owned, will see its assets

increasingly challenged by depreciation.

“I can say that today 35 per cent of the

equipment in our power plants has been

in use for more than 50 years. If we do not

start to invest in modernization now, by 2020

almost 50 per cent of our equipment will

have an operating life of more than 50 years,”

explains Denis Fedorov, general director of

Gazprom Energoholding.

“The current electricity prices do not

provide for payback even at a moderate rate

of return of 13 per cent,” says Maxim Shirokov,

CEO of E.ON Russia. Founded on the basis

of five former RAO-UES power stations, E.ON

Group rapidly became the largest foreign

investor in the Russian power sector.

Today, its Russian subsidiary is the most

efficient thermal power generation company

in Russia and owns one of the best fleets

of the company globally. Nonetheless, to

continue investing in energy efficiency and

sustain its 10,345 MW of capacity in Russia, the

company is urging the Russian government to

develop a clear-cut strategy that can provide

for the necessary returns.

“Our industry is desperately waiting for the

second wave of reforms. The current state of

the market is highly regulated and hands-on

driven, which is not good for investments,”

adds Shirokov. Going forward, Shirokov sees

two possible options for the country’s policy

makers: subsidized governmental support or

thorough reforms. “Frankly,” Shirokov adds, “we

prefer the second option rather than the first

mainly because one-off government stimuli

do not benefit the market as a whole.”

With a continuing vagueness on what

shape a potential second wave of reforms

could take, 2013 could represent an important

turning point for the sector.

Putting the I in ROIOn the one hand, the Russian government

has made it clear that new investment into

its power sector cannot rely too much on

government subsidies while, on the other,

the private sector remains reluctant to invest

without any government guarantees on ROI.

The Russian banking sector, in the meantime,

upholds a cost of borrowing that is barely

tempting for private investors.

“The foundations of the power sector

reforms lay in the fact that modernization

would only become possible through market

Ivan Grachev, chairman, State Duma Energy Committee

Sergey Novikov, head, Federal Tariff Service of Russian Federation

Denis Fedorov, general director, Gazprom Energoholding

Maxim Shirokov, CEO, E.ON Russia

Pattern of Russia’s electricity consumption over the last 20 yearsCredit: RusHydro


7


Russia

cost-competitive, Russian policy makers have

a significant task ahead them.

A second wave of reforms?“The most important aspect is to find a

balance between the interests of the

investors and the consumers of electricity,”

says Sergey Novikov, head of the Federal

Tariff Service. When asked about the recent

increase in electricity tariffs, Novikov reflects

on the period 2010–11 when the decisions of

the regional regulatory authorities, which are

independent of the Federal Tariff Service, led

to a hike in tariffs.

Commenting on the impact on small to

medium-sized businesses, Novikov recalls that

“they saw their prices increasing abruptly,

by 30–50 per cent, urging us to adjust the

regulatory framework.

“Today we also have the very important

task of protecting investors. Apart from finding

the right balance, we therefore also need to

make the right decisions. Capital structures

need to be balanced out so that financing

can come from tariffs, the budget or from

investments,” he concludes.

Although the CSA model is approaching

its natural end, generating companies remain

puzzled over what will replace it. While still

profitable today, generation companies in

Russia are anxiously waiting for further reform

of the power sector to justify their much-

needed investments in the modernization

of their facilities. On example is Gazprom

Energoholding. With its 80 power plants

totalling over 37 GW, it is the largest generator

in Russia and one of the top-ten worldwide.

Without further reforms, however, the company,

which is majority state-owned, will see its assets

increasingly challenged by depreciation.

“I can say that today 35 per cent of the

equipment in our power plants has been

in use for more than 50 years. If we do not

start to invest in modernization now, by 2020

almost 50 per cent of our equipment will

have an operating life of more than 50 years,”

explains Denis Fedorov, general director of

Gazprom Energoholding.

“The current electricity prices do not

provide for payback even at a moderate rate

of return of 13 per cent,” says Maxim Shirokov,

CEO of E.ON Russia. Founded on the basis

of five former RAO-UES power stations, E.ON

Group rapidly became the largest foreign

investor in the Russian power sector.

Today, its Russian subsidiary is the most

efficient thermal power generation company

in Russia and owns one of the best fleets

of the company globally. Nonetheless, to

continue investing in energy efficiency and

sustain its 10,345 MW of capacity in Russia, the

company is urging the Russian government to

develop a clear-cut strategy that can provide

for the necessary returns.

“Our industry is desperately waiting for the

second wave of reforms. The current state of

the market is highly regulated and hands-on

driven, which is not good for investments,”

adds Shirokov. Going forward, Shirokov sees

two possible options for the country’s policy

makers: subsidized governmental support or

thorough reforms. “Frankly,” Shirokov adds, “we

prefer the second option rather than the first

mainly because one-off government stimuli

do not benefit the market as a whole.”

With a continuing vagueness on what

shape a potential second wave of reforms

could take, 2013 could represent an important

turning point for the sector.

Putting the I in ROIOn the one hand, the Russian government

has made it clear that new investment into

its power sector cannot rely too much on

government subsidies while, on the other,

the private sector remains reluctant to invest

without any government guarantees on ROI.

The Russian banking sector, in the meantime,

upholds a cost of borrowing that is barely

tempting for private investors.

“The foundations of the power sector

reforms lay in the fact that modernization

would only become possible through market

Ivan Grachev, chairman, State Duma Energy Committee

Sergey Novikov, head, Federal Tariff Service of Russian Federation

Denis Fedorov, general director, Gazprom Energoholding

Maxim Shirokov, CEO, E.ON Russia

Pattern of Russia’s electricity consumption over the last 20 yearsCredit: RusHydro


www.PowerEngineeringInt.com 113Power Engineering International May 2013

Russia

mechanisms. But there is a strong disparity

between the money needed for modernization

and the revenues that can be raised from the

end-user side,” says Ivan Grachev, chairman of

the State Duma Energy Committee.

“We need federal investment programmes

specific to our energy sector. Moreover, we

require better regulations around energy

efficiency. All in all, drastic changes are

required,” Grachev adds.

Making energy efficiency a national

priority has been a noteworthy step forward

for Russia, a country where saving electricity or

heat in the past would barely imply significant

financial savings because of the low tariffs.

The International Energy Agency, for

instance, stated that “according to the World

Energy Outlook 2011, if Russia had used

energy as efficiently as comparable OECD

countries in each sector of the economy

in 2008, it could have saved more than

200 million tonnes of oil equivalent, equal to 30

per cent of its consumption that year.”

Moreover, as indicated by a joint report by

the International Finance Corporation and the

World Bank, a more energy-efficient economy

would also allow Russia to increase its oil and

gas exporting earnings. According to the 2011

report, Russia’s energy intensity costs in the

region of $84–112 billion per year in terms of

lost export revenues.

These indicators have not gone

unnoticed by policy makers, which in 2011

implemented Law 261: On Saving Energy

and Increasing Energy Efficiency. The

programme aims to reduce energy intensity

by 40 per cent by 2020 (compared to 2007).

It will be a long journey, but to help achieve

this target, President Vladimir Putin has

called upon foreign technology providers to

partner with Russian companies in the area

of energy efficiency.

Looking outside Russia’s bordersUp to 2007–08, power stations in Russia were

still being built by generation companies

themselves, through subcontractors. “The last

power plant constructed in this method was

built near Nizhny Novgorod,” recalls Vladimir

Babyak, general director of the medium-sized

Russian EPC company Intertechelectro.

As a result of the power sector reform,

companies like Intertechelectro rapidly

understood that a new market model for power

generation would also require a new group of

EPC companies.

In just a few years, several of these newly-

formed organizations have managed to gain

a breadth of experience in new construction.

Now, these companies are preparing

themselves for a wave of new projects that will

focus more on modernization instead.

To rapidly ramp up their competences, this

new generation of Russian EPC players looks

at – or at least recognizes the value of – pulling

in experienced players from outside Russia’s

borders. These experienced international EPC

companies, in turn, find themselves with a

range of potential Russian partners.

“With regard to the construction of

power plants, foreign companies eventually

have to address Russian partners to submit

documentation in order to receive the

necessary approvals or permits. Consequently,

we operate with a number of foreign partners,

each claiming that without the participation

– or input - of a Russian company they would

never be able to succeed,” he says.

“The first power plant Intertechelectro built

comprised of two 62 MW generating units in

Noyabrsk. Subsequently, we commissioned

power generating units with a 110 MW

capacity and a power unit of 230 MW.

Consequently, it would be interesting either

to commission larger power units or move

into coal-fired power plants. Moreover, we

would be interested in conducting a project

in cooperation with a western engineering

company. This would provide us with the

opportunity to share knowledge and

expertise,” Babyak concludes.

Even though young Russian EPC

companies like Intertechelectro, which

was established in 2005, now focus on the

Russian market, their engineers and experts

still enjoy a good reputation abroad. Many

of Russia’s engineers have already worked

on construction projects in regions such as

North Africa and the Middle East.

For 80 years, local engineering company

ORGRES has been sending its engineers to

construction projects across the globe. “These

international projects are testament to the

brand that ORGRES represents,” says General

Director Aleksandr Yushin.

“They give us the opportunity to see how

competitive we are in foreign markets and

help us understand how we can compete

in the market of engineering services with

new competitors from China, India and other

countries. Overall, they help us to understand

our place in the market and identify our


Russia energy report July 2013


strong and weak points as an engineering

company,” Yushin says.

Although perhaps a little too soon

right now, Russia’s new generation of EPC

companies may want to leverage their

expansive domestic experience, as well

as their international partnerships to start

operating internationally.

Investment in electrifying Russia In a heavily industrialized economy that

is likely to continue growing annually at

3-4 per cent, under-investment in

electrification can be a serious headache.

For the period 1990-99, when Russia was

experiencing negative economic growth,

investments in its power grid were not needed

and, therefore, not made.

With soaring GDP growth up to 10 per cent

during the following decade however, Russia

was soon required to reassess the liabilities of

its grids. During the reorganization of Russia’s

power industry in the early 2000s, the Federal

Grid Company (FGC) was established.

The majority state-owned entity operates

and manages the country’s unified power

transmission grid system, including high-

voltage transmission lines.

“Today, wear and tear of our equipment

is 50 per cent, which in fact, compared to the

rest of the world, could be worse. However, in

the past few years, many emergency backup

power facilities and transmission lines have

been built in other countries. Unfortunately, we

still do not have sufficient backup facilities in

Russia. Therefore, a major task for Federal Grid’s

team is to increase the share of investments into

modernization from the current 35 per cent to

50 per cent. This will enable us to renew almost

3000 km of transmission lines and approximately

20 high-voltage substations per year,” explains

Oleg Budargin, chairman of FGC.

“Currently, Russia’s energy sector faces

three critical tasks: establishing fair tariffs,

enabling access to grid

infrastructure, and ensuring

that the development of a

national grid infrastructure

outpaces economic growth

as a whole,” hints Budargin. To

this end, the Ministry of Energy

has approved the FGC’s 2013-

17 investment programme,

totaling around R775.5 billion

($24.6 billion).

STARTING SMALL IN A BIG COUNTRYCheap energy has kept many Russian manufacturers puzzled about what incentive there is to invest in energy efficiency. There is, however, a second reason behind Russia’s very low efficiency score. “Another element was the fact that Russia had numerous state companies, which were driven by different targets and objectives. Back then, profitability was not the main driver and competition levels were different than today,” explains Mikhail Shapiro, general manager of Danfoss in Russia.

Although its head office sits in Denmark, Danfoss has already invested more than $64 million in its Russian manufacturing sites to supply the country’s industrial facilities with energy-saving heating, refrigeration and frequency converters.

“Now that many of these companies have been privatized and they actively

need to compete with new entrants in the market, price levels have dropped and a focus on profitability has gained increasing momentum,” Shapiro adds.

“Russia hosts large volumes of industrial activities of various types. From a certain perspective, these can all be considered gold mines because of their required modernization. We currently see a situation where the market dictates the price pres-sure. Ongoing privatization has been forcing

industry to look at how it could reduce cost and how save energy,” he says.

In some cases, such as frequency converters, only limited investments are required to achieve an ROI of less than two years. “It really is the most effective way for a commercial enter-prise to reduce cost and increase competiveness in quality” Shapiro adds

Aleksandr Yushin, general director, ORGRES

Vladimir Babyak, general director, Intertechelectro

Russia

Mikhail Shapiro, general manager, Danfoss Russia


8

9


strong and weak points as an engineering

company,” Yushin says.

Although perhaps a little too soon

right now, Russia’s new generation of EPC

companies may want to leverage their

expansive domestic experience, as well

as their international partnerships to start

operating internationally.

Investment in electrifying Russia In a heavily industrialized economy that

is likely to continue growing annually at

3-4 per cent, under-investment in

electrification can be a serious headache.

For the period 1990-99, when Russia was

experiencing negative economic growth,

investments in its power grid were not needed

and, therefore, not made.

With soaring GDP growth up to 10 per cent

during the following decade however, Russia

was soon required to reassess the liabilities of

its grids. During the reorganization of Russia’s

power industry in the early 2000s, the Federal

Grid Company (FGC) was established.

The majority state-owned entity operates

and manages the country’s unified power

transmission grid system, including high-

voltage transmission lines.

“Today, wear and tear of our equipment

is 50 per cent, which in fact, compared to the

rest of the world, could be worse. However, in

the past few years, many emergency backup

power facilities and transmission lines have

been built in other countries. Unfortunately, we

still do not have sufficient backup facilities in

Russia. Therefore, a major task for Federal Grid’s

team is to increase the share of investments into

modernization from the current 35 per cent to

50 per cent. This will enable us to renew almost

3000 km of transmission lines and approximately

20 high-voltage substations per year,” explains

Oleg Budargin, chairman of FGC.

“Currently, Russia’s energy sector faces

three critical tasks: establishing fair tariffs,

enabling access to grid

infrastructure, and ensuring

that the development of a

national grid infrastructure

outpaces economic growth

as a whole,” hints Budargin. To

this end, the Ministry of Energy

has approved the FGC’s 2013-

17 investment programme,

totaling around R775.5 billion

($24.6 billion).

STARTING SMALL IN A BIG COUNTRYCheap energy has kept many Russian manufacturers puzzled about what incentive there is to invest in energy efficiency. There is, however, a second reason behind Russia’s very low efficiency score. “Another element was the fact that Russia had numerous state companies, which were driven by different targets and objectives. Back then, profitability was not the main driver and competition levels were different than today,” explains Mikhail Shapiro, general manager of Danfoss in Russia.

Although its head office sits in Denmark, Danfoss has already invested more than $64 million in its Russian manufacturing sites to supply the country’s industrial facilities with energy-saving heating, refrigeration and frequency converters.

“Now that many of these companies have been privatized and they actively

need to compete with new entrants in the market, price levels have dropped and a focus on profitability has gained increasing momentum,” Shapiro adds.

“Russia hosts large volumes of industrial activities of various types. From a certain perspective, these can all be considered gold mines because of their required modernization. We currently see a situation where the market dictates the price pres-sure. Ongoing privatization has been forcing

industry to look at how it could reduce cost and how save energy,” he says.

In some cases, such as frequency converters, only limited investments are required to achieve an ROI of less than two years. “It really is the most effective way for a commercial enter-prise to reduce cost and increase competiveness in quality” Shapiro adds

Aleksandr Yushin, general director, ORGRES

Vladimir Babyak, general director, Intertechelectro

Russia

Mikhail Shapiro, general manager, Danfoss Russia



Russia

In spite of Russia’s clear-cut investment

programme for the FGC, its policy makers

face a number of challenges. Today, the

transmission and distribution infrastructure

from generation facilities to the end

consumer is still divided into three parts: the

high-voltage grid managed by the FGC, the

low-voltage distribution grids grouped under

IDGC Holding, and the city grids. The lack

of coordination between the management

policies of these three entities results in an

array of problems.

“Currently, there are almost 100 distribution

network companies and approximately 6000

city grids in Russia, and they are not required to

adhere to the

same tech-

n o l o g i c a l

s ta n d a rd s .

We could

have pre-

vented many

of today’s

problems, if

unified stan-

dards for the

electric grid system had been established

from the beginning,” Budargin protests.

In response, a decree for the creation

of a new unified company was signed by

President Putin on 22 November, 2012. The new

joint-stock company, which will be known as

‘Russian Grids’ from 30 June this year, will unite

Russia’s high and low-voltage networks.

High volumes of high voltageIn a country as large as Russia, with around

125,000 km of transmission lines and more than

850 high-voltage substations from FGC alone,

many successful present-day equipment

manufacturers see their Soviet experience –

when the grid was initially constructed – as an

important part of their history.

Take the electrical equipment

manufacturer ZETO, for instance. The company

mainly works in the area of high-voltage

equipment up to 750 kV. A main supplier to

FGC today, ZETO can look back at an extensive

During Russia’s rapid recovery from the financial crisis in 2009, policy makers successfully attracted a number of bids for international mega-events, resulting in a boom in construction activity. Now, the country is ramping up its infrastructure to host the 2013 Summer Universiade, the 2014 Winter Olympics and the 2018 FIFA World Cup.

The Kremlin is well aware of the international exposure that will be generated by the 2014 Winter Olympics in Sochi, which are expected to be the most expensive Games ever at $50 billion.

For the power engineering industry, these projects could become an opportunity to demonstrate their capabilities to modernize Russia’s power infrastructure.

MEGALOMANIA, BUT THE GOOD KIND

Oleg Budargin, chairman, Federal Grid Company

The Roza Khutor substation built for the 2014 Winter Olympics in Sochi

Credit: FGC


10


Russia

track record of projects from the Soviet period.

“We build on, and keep, our Soviet heritage

as it shows the experience we have in the

energy market. This experience is testament

to the capability we have in bringing

together construction services and science, a

knowledge base that is not always easy to find

today. We combine our experience and look

at improving our approach, upgrading our

production and modernizing our company.

We cannot forget our past. Many companies

of the Soviet era, which were given countless

opportunities to develop, continue to exist

today,” recalls Alexander Kozlovsky, general

director of ZETO.

“We have taken part in the electrification

of our country as well as other nations in

Asia, Africa and Latin America, in countries

like Cuba. The products that have been

supplied to those countries and facilities are

still in place, which proves that they are of high

quality,” boasts Kozlovsky.

Regardless of any political affiliations, the

world should not forget what these companies

were able to achieve 50–60 years ago. They

have played an active role in engineering

one of the largest power grids in the world

and now form an important asset within the

current modernization process.

A new nuclear raceWhen the former US secretary of state Hillary

Rodham Clinton visited Prague in December

2012, her words found a ready audience in

the Kremlin. “We are encouraging the Czech

Republic to diversify its energy sources and

suppliers,” Clinton said in an attempt to

make the Czech Republic wean itself off its

dependency on Russia for fuel. Ever since

the government of the Czech Republic said

it would ramp up nuclear power generation

to reduce its dependency on coal plants

and imported natural gas, the country

has become a geopolitical battlefield for

rival nuclear consortia backed by both

Washington D.C. and Moscow.

While the Czechs will not be in a position

to announce the winner of the $10 billion

contract to build two new reactors at its

Temelin nuclear power plant until September,

Russia’s nuclear state corporation Rosatom is

out to win.

In 2011, the company nearly doubled its

overseas construction orders to 21 despite the

weak global economy and the Fukushima

Daiichi nuclear meltdown in Japan. At the

start of this year, the company already had

an order book to build more than 30 blocks in

Russia and abroad.

“Today, Rosatom is one of the biggest

global players in this sector,” says Kirill Komarov,

deputy general director, global business

development. In addition to a healthy pipeline

of NPPs [nuclear power plants] coming on

stream, Komarov points out that Russia is more

than a leader in NPP construction alone.

“We are already the number one in the

world in terms of uranium enrichment, with a

global share of around 41 per cent. In terms

of uranium reserves, we moved from seventh

to second place in just a few years, thanks

to our global presence and several assets

around the world. As for nuclear fuel, we are

currently number three in the world, owning

20 per cent of the world share,” he elaborates.

For Rosatom to sustain its global

leadership, it will need to keep research and

development, e.g. by developing fast reactors,


11


Russia

track record of projects from the Soviet period.

“We build on, and keep, our Soviet heritage

as it shows the experience we have in the

energy market. This experience is testament

to the capability we have in bringing

together construction services and science, a

knowledge base that is not always easy to find

today. We combine our experience and look

at improving our approach, upgrading our

production and modernizing our company.

We cannot forget our past. Many companies

of the Soviet era, which were given countless

opportunities to develop, continue to exist

today,” recalls Alexander Kozlovsky, general

director of ZETO.

“We have taken part in the electrification

of our country as well as other nations in

Asia, Africa and Latin America, in countries

like Cuba. The products that have been

supplied to those countries and facilities are

still in place, which proves that they are of high

quality,” boasts Kozlovsky.

Regardless of any political affiliations, the

world should not forget what these companies

were able to achieve 50–60 years ago. They

have played an active role in engineering

one of the largest power grids in the world

and now form an important asset within the

current modernization process.

A new nuclear raceWhen the former US secretary of state Hillary

Rodham Clinton visited Prague in December

2012, her words found a ready audience in

the Kremlin. “We are encouraging the Czech

Republic to diversify its energy sources and

suppliers,” Clinton said in an attempt to

make the Czech Republic wean itself off its

dependency on Russia for fuel. Ever since

the government of the Czech Republic said

it would ramp up nuclear power generation

to reduce its dependency on coal plants

and imported natural gas, the country

has become a geopolitical battlefield for

rival nuclear consortia backed by both

Washington D.C. and Moscow.

While the Czechs will not be in a position

to announce the winner of the $10 billion

contract to build two new reactors at its

Temelin nuclear power plant until September,

Russia’s nuclear state corporation Rosatom is

out to win.

In 2011, the company nearly doubled its

overseas construction orders to 21 despite the

weak global economy and the Fukushima

Daiichi nuclear meltdown in Japan. At the

start of this year, the company already had

an order book to build more than 30 blocks in

Russia and abroad.

“Today, Rosatom is one of the biggest

global players in this sector,” says Kirill Komarov,

deputy general director, global business

development. In addition to a healthy pipeline

of NPPs [nuclear power plants] coming on

stream, Komarov points out that Russia is more

than a leader in NPP construction alone.

“We are already the number one in the

world in terms of uranium enrichment, with a

global share of around 41 per cent. In terms

of uranium reserves, we moved from seventh

to second place in just a few years, thanks

to our global presence and several assets

around the world. As for nuclear fuel, we are

currently number three in the world, owning

20 per cent of the world share,” he elaborates.

For Rosatom to sustain its global

leadership, it will need to keep research and

development, e.g. by developing fast reactors,



Russia

at the top of

its agenda.

Despite being

a dominant

supplier of raw

materials, such

as oil, gas and

metals, to the

world markets,

Russia has

failed to profile

itself as a

country that exports in large quantities high-

tech competitive products internationally.

However, when Prime Minister Dmitry

Medvedev held a meeting at Rosatom’s

NPP in Voronezh, 515 km south of Moscow,

he declared the international promotion of

nuclear technologies as a strategic goal for

the country.

Rosatom’s Komarov agrees, saying “We

definitely believe that nuclear energy can be

the sector for Russia to not only export raw

materials but also new modern technologies.”

Private partnerships in nuclearWhile the nuclear industry will continue

to be driven by geopolitical interests

globally, the Russians have taken on an

increasingly cooperative stance with their

international counterparts. Based in Moscow,

KomplektEnergo is one of the private

companies that has been supplying and

servicing nuclear equipment and spare parts

to Rosenergoatom since 2002, two years after

a change in Russian laws allowed increased

participation of private companies in nuclear.

Of the ten NPPs in Russia –which

Rosenergoatom operates on behalf of

Rosatom – KomplektEnergo now provides

equipment or services to eight of them

together with its partners.

“The competitive environment is changing

quite significantly,” says Olga Dolgova, director

general of KomplektEnergo. “Now we can

see that the European producers – which in

the past did not seek to get into the Russian

market – study the needs of Russian customers

and make them quite competitive offers. This

competition has made the Russian market

one of the most advanced in terms of Western

technology,” adds Dolgova.

Private companies such as KomplektEnergo

function as a gateway to Russia’s nuclear

market for many of the leading European

manufacturers. “As for our competitive

advantages, over the last ten years we have

had the opportunity to represent Ukrainian,

Czech and German producers in the Russian

market,” says Dolgova.

In particular, KomplektEnergo has

established a number of long-term

partnerships with companies such as

Ukraine’s Turboatom, the Czech company

Vitkovice Power Engineering and Germany’s

Taprogge. These businesses are strategic

partners of KomplektEnergo today.

KomplektEnergo is also a participant

in one of Rosatom’s most promising and

innovative projects. In 2013, KomplektEnergo

entered into an agreement with the joint

public-private enterprise AKME-engineering

to develop, manufacture and supply the

steam turbine and additional equipment

for a pilot plant incorporating their

SVBR-100 reactor, a lead–bismuth eutectic

cooled fast reactor.

“The project is being implemented

within the framework of the federal target

programme New Generation Nuclear

Power Technologies for 2010–2015 and

Future Trends up to 2020, and is one of the

projects of the Presidential Commission

for the modernization and technological

development of Russia’s economy within

the framework of the New technological

platform: closed nuclear fuel cycle and fast-

neutron reactors, says Dolgova.

“The project is very attractive in a number

of different ways, from the cooperation with a

HIGH-PROFILE DOMESTIC HYDROPOWER PROJECTSRussia hosts four of the 12 largest hydroelectric dams in the world, but two projects drew particular attention in recent years. Sayano-Sushenskaya was the first. The sixth biggest in the world, this hydropower plant hit the news headlines worldwide when a devastating accident in 2009 killed 75 people. Its fast-paced reconstruction, however, became a national priority. RusHydro, its operator, is seeking a completion date of 2014 for what is seen as a flagship project.

The second major project, Boguchanskaya, grew into what many thought would become a never-ending

story. After decades of delays, Rushydro and its partners are now finally bringing the 3000 MW plant – half the capacity of Sayano-Sushenskaya – into operation.

A partner to Rushydro and active participant in the project is the St Petersburg-based Rakurs. Over the years, Rakurs has grown from a company designing software for hydro generator control systems into a turnkey automation provider for both hydro and thermal plants.

It is one of many companies that saw the dissolution of the Soviet Union as an opportunity to develop untapped industrial niches.

Today, Rakurs works with a number of technology leaders, including Siemens, Schneider Electric, GE’s Bently Nevada, Metso Automation and Swiss company Brüel & Kjær. However, of the 500 projects the company has successfully completed Leonid Chernigov, Rakurs’ general manager, identifies Boguchanskaya as the most prominent.

“Boguchanskaya is a plant that started construction in Soviet times,” Chernigov recalls. Indeed, during the initial preparatory works in 1974, few would have expected Boguchanskaya to take this long to finish. At

the same time, it would have been unthinkable to imagine the plant as one of the most hi-tech projects in RusHydro’s portfolio 40 years later.

“It is one of our most advanced projects as we integrated all s u b s y s te m s linked to the m a n a g e m e n t of aggregates and auxiliary subsystems,” Chernigov details.

As Russia seeks greater energy efficiency, the drive towards greater automation in its hydropower landscape is set to continue. However, with Sayano-Sushenkaya fresh in the minds of many at least as important is the impact such modernization efforts will have on the overall safety and reliability of these mega-structures. In the next ten to 15 years, RusHydro alone foresees a $10 billion requirement for plant modernization.

Sayano-Shushenskaya, Russia’s largest hydroplant, and at 6.4 GW

is one of the world’s biggestCredit: RusHydro

Leonid Chernigov, general manager, Rakurs

Alexander Kozlovsky, general director, ZETO


12


Russia

fully-fledged government-private company,

to the economic perspectives of the project

and market demand for the small modular

reactors under construction, ending with

the large-scale manufacturing of SVBR-100

reactors,” Dolgova concludes.

Head above waterHome to the world’s largest natural gas

reserves, the second largest coal reserves

and the eighth largest oil reserves, renewable

energy never really stood a chance to develop

in Russia. And despite the government’s recent

ambitions to develop their share in the energy

mix, solar and wind power have barely gained

more than 1.5 per cent to date.

As a highly industrialized BRIC nation,

Russia now sees itself forced to take steps

against the increasing

competitive pressure

from heavy industries in

neighbouring China. As one

of its many countermeasures,

the Kremlin has sent

RusHydro to support industrial

development in Siberia and

the country’s Far East region.

“When the government

decided to provide us with the

assets of RAO-UES of Far East,

around 9000 MW of installed capacity, several

networks in that region were also added. We

KomplektEnergo collaborates with TurboatomCredit: KomplektEnergo

Olga Dolgova, general director, KomplektEnergo

Kirill Komarov, deputy general director, Global Business Development, Rosatom

BUILDING THE NEXT GENERATIONSize matters in Russia, and expectations are big, very big. Inter RAO evolved from an international energy trader into a diversified energy holding which now includes 33.5 GW of generation capacity. In a recent move, the company put Yuri Sharov – a top executive and one of its long-standing board members – in charge of Inter RAO Engineering. According to Sharov, “ the move is a way for the generation company to pursue vertical integration within the law, which forbids generation companies

from entering the grid sector. By eyeing the c o n s t r u c t i o n of generation f a c i l i t i e s instead, Russia’s g e n e r a t i o n companies are ramping up in size along an entirely new dimension.”

Yuri Sharov, general director, Inter RAO Engineering


13


Russia

fully-fledged government-private company,

to the economic perspectives of the project

and market demand for the small modular

reactors under construction, ending with

the large-scale manufacturing of SVBR-100

reactors,” Dolgova concludes.

Head above waterHome to the world’s largest natural gas

reserves, the second largest coal reserves

and the eighth largest oil reserves, renewable

energy never really stood a chance to develop

in Russia. And despite the government’s recent

ambitions to develop their share in the energy

mix, solar and wind power have barely gained

more than 1.5 per cent to date.

As a highly industrialized BRIC nation,

Russia now sees itself forced to take steps

against the increasing

competitive pressure

from heavy industries in

neighbouring China. As one

of its many countermeasures,

the Kremlin has sent

RusHydro to support industrial

development in Siberia and

the country’s Far East region.

“When the government

decided to provide us with the

assets of RAO-UES of Far East,

around 9000 MW of installed capacity, several

networks in that region were also added. We

KomplektEnergo collaborates with TurboatomCredit: KomplektEnergo

Olga Dolgova, general director, KomplektEnergo

Kirill Komarov, deputy general director, Global Business Development, Rosatom

BUILDING THE NEXT GENERATIONSize matters in Russia, and expectations are big, very big. Inter RAO evolved from an international energy trader into a diversified energy holding which now includes 33.5 GW of generation capacity. In a recent move, the company put Yuri Sharov – a top executive and one of its long-standing board members – in charge of Inter RAO Engineering. According to Sharov, “ the move is a way for the generation company to pursue vertical integration within the law, which forbids generation companies

from entering the grid sector. By eyeing the c o n s t r u c t i o n of generation f a c i l i t i e s instead, Russia’s g e n e r a t i o n companies are ramping up in size along an entirely new dimension.”

Yuri Sharov, general director, Inter RAO Engineering



Russia

are currently working on the synchronization

of our investment programmes with the

construction of comprehensive infrastructure

in Siberia and the Far East. We now have

expansive investment projects focused the

modernization of the energy sector and the

construction of new facilities in that region,”

says RusHydro chairman Evgeny Dod.

Looking at the bigger picture, Russia

is now focusing on tying up with several

governments to replicate the capabilities of

its national hydro champion in other parts of

the world.

“For certain regions such as northern

Canada, Brazil’s Amazon region, Central

and Western China, low-cost energy through

hydropower can certainly be the engine

of industrial development,” explains Dod.

Potential investors will also find it hard to

ignore the fact that with 35.2 GW of capacity

RusHydro has already grown into the world’s

second-largest hydropower player, based on

its Russian assets alone.

Visit www.PowerEngineeringInt.com for more information i

RAMPING UP FOR THE NUCLEAR RENAISSANCE

In Russia in particular, a number of leading equipment suppliers are preparing for a ‘nuclear renaissance’.

Moscow-based Zio-Podolsk, for instance, is one of the largest manufacturers of complex heat exchange equipment for nuclear, thermal and heavy industries. To support its growth ambitions, Zio-Podolsk has embarked on a R6 billion investment programme over the next five years.

“We continue to invest significantly in the modernization of our facilities and the acquisition of new equipment. I have not seen any other thermal equipment manufacturer with the same investment programme,” says General Director Igor Kotov. When asked about his first year in charge, Kotov looks back at 2012

as a year in which the company managed to strengthen relationships with its partners.

Although unthinkable in the past, Russian and foreign companies are now looking at various forms of cooperation to jointly develop the traditionally closed sector of nuclear energy in Russia, as well as abroad.

“In addition to the Russian market, we are also looking at other markets outside of Russia’s borders, such as Kazakhstan and Ukraine. Furthermore, we have entered into a licensing agreement with NEM – a leading Dutch engineering company.

“Together we are studying the different markets in which we can cooperate, such as the Middle East or South Africa. We are also operational in India through our collaboration

with Ansaldo,” Kotov illustrates.

“Our license agreement with NEM – which produces some of the best boilers in the world – is very competitive. Of course, these products are not fully Russian but we understand the technology and have successfully deployed it at several plants in Moscow for instance,” he concludes.

Igor Kotov, general director, Zio-Podolsk


14

Dmitry Govorov, DIRECTOR – ASSOCIATION OF POWER CONSUMERS

Interview with: Dmitry Govorov, director – Association of Power Consumers

INTERVIEW WITH:

Dmitry Govorov, director – Association of Power Consumers

Focus Reports: A number of experts have stated that the Russian retail electricity market con-tinues to exist as a monopoly. What is your stance on this point of view?DMITRY GOVOROV: The main complaint of consum-ers is the monopoly of guaranteeing suppliers on the retail market. With the approval of the Directive 442, some of the issues faced by con-sumers –such as the entry barriers to the whole-sale market– have been addressed now. Certain problems do persist nonetheless, such as the fact that there are different rules of competi-tion between guaranteeing suppliers and other independent retail companies. This is a very important issue because there are many differ-ences in the requirements for independent com-panies and for guaranteeing suppliers with regards to the provision of services. The very institute of independent retail companies is still not developed enough to allow for consum-ers to turn to big players who are in fact really independent.

FR: What do you identify as the biggest challenge for the retail electricity market to become more competitive?DMITRY GOVOROV: First we have to deal with the problem of the status of guaranteeing suppli-ers. The problem lies at the beginning of the

reforms where the guaranteeing suppliers were assumed to become so-called “suppliers of last resort”. Guaranteeing suppliers are still strictly regulated by the government. They provide ser-vices to the population and consumers that did not –or could not– sign contracts with indepen-dent retail companies. This is what what the reform wanted to achieve, but unfortunately reality turned out differently. We believe that consumers –like in other countries in Europe and in the U.S.– must have the right to choose.

There is another issue we consider quite important: retail consumers are not fitted with enough electricity meters. At the same time, we also think that the requirements for commer-cial accounting in the Russian market are too high and overcharged. We should move towards a system with simpler equipment.

FR: Investments are needed on the capacity side. Many generation companies, however, argue that tariffs are not high enough to justify these investments. From a consumer perspective, do you understand this concern? What do you see as an acceptable growth rate in tariffs for the coming years?DMITRY GOVOROV: We do not agree with the price growth rates that are being provided by the Ministry of Economic Development. We believe

15

that in the energy sector there is enough money to modernize generating capacities as well as to build new ones.

An important issue is the price structure. For consumers, the important thing is the final price, which as we know comes from the value of electricity and capacity plus the network com-ponent and the investment and expenses on infrastructure. In Russia, the structure of the final price on the energy and capacity market –which is what generators actually make– equals 50%. Of that, 40% is the network com-ponent, and the additional retail charges that come from the guaranteeing suppliers account for about 6-7%. We looked at foreign markets and we understand that there the network com-ponent does not account for more than 20% of the price structure, and now it is even down to 10%.

What we want to achieve, is to develop net-work tariffs. As for modernization and new infrastructure, we do not need to implement non-market mechanisms such as the “Agree-ment on capacity supply”. We think those are not market mechanisms and therefore unneces-sary. That is a 2008 agreement and therefore must be carried out to completion, however new non-market mechanisms like those are unnec-essary and quite counterproductive.

We think that the government does not pro-vide for accurate forecasts regarding the growth in energy demand. We think these government estimates exceed reality. We estimate that the real growth in demand stands at around 1.5%. Taking into accounts the building of personal capacity and the implementation of energy effi-cient technologies, we think 1.5% is actually an optimist estimate. The government, however, works with estimates of roughly 2%. As a result, there are new inflated investment programs to build new capacity. However, that new capacity will not be used because the market does not need it. According to the Market Council by 2018 there will be 27 GW of unnecessary capac-ity. Actually according to our estimates there even can be 40 GW. This is a capacity paid by the market yet unneeded. We must develop a sys-tem of distributed generation, which must be built through direct contracts with those con-sumers who need that capacity.

Another issue on the market is the total

absence of direct contract between consumers and generating companies. Our wholesale mar-ket consists of the capacity and electricity mar-ket and we see this as a disadvantage. This is because the presence of a capacity market does not provide a stimulus for generating companies to sign direct agreements with consumers. Namely, if they have always guaranteed money they have less of an interest to sign long-term contracts. However, it is with these long-term contracts that we could think about building new capacity, and in general a foundation for attracting investment. Long-term contracts would therefore be much more comfortable for generators in our view.

FR: The tariff liberalization in the market is in fact still quite recent. To our readers, less famil-iar with the Russian retail market, can you explain how tariffs are set, and what the break-down in mark-ups is?As I mentioned, the structure of final prices are set the following way: the network sets about 40% and that is the Federal Grid Company (FSK), which is the main network, and the Inter-regional Distribution Grid Company (MRSK), which is the distribution network. Then there are several territorial network companies. Then 50% is the electricity itself, and that is what producers of energy receive. And finally about 6% is what the guaranteeing suppliers receive.

We believe that consumers –like in other countries in Europe and in the U.S.– must have the right to choose.

16

Igor Mironov, CEO – COUNCIL OF POWER PRODUCERS

Interview with: Igor Mironov, CEO – Council of Power Producers

INTERVIEW WITH:

Igor Mironov, CEO – Council of Power Producers

Focus Reports: One of the objectives of the Council of Power Producers (CPP) is to increase competi-tiveness and promote the overall attractiveness of Russia’s power sector to investors. In your per-spective, how attractive is the sector for investors today?IGOR MIRONOV: Our partnership has been created five years ago, when the investors decided that an organization was needed to voice their shared interests. This applied to both infrastructure organizations -such as the NP Market Council- as well as governmental organizations. This is how our organization came into existence. The start of our work coincided with the global finan-cial crisis, which has created one additional hur-dle. However, today we are already seeing results and are looking at a growth path that is set to continue in the next few years.

As for investment attractiveness, one of the key successes in our first two years has been the Treaty of Energy Capacity. Still now, we are work-ing on finalizing this document and having it signed and approved. So far, this Treaty has been our greatest achievement as it constitutes a com-promise between both the power producers and -consumers. This document -referred to as the ‘modernization program’- identifies several tech-nical aspects and technological advancements required to renew the Russian energy sector in the future.

One of the most important aspects of this modernization program is the economic model that will need to be put in place to allow for new investment. Russia’s power market is semi-reg-ulated; the government still plays an important role in price formation. Although there is not much freedom in that regard, we understand that the country is still in a transition period. The government is trying to control and regulate the relatively ‘wild’ market we have here.

At the same time, we are also working on a new market model with the aim to enhance the integration of our sector within the global mar-ket. This will include price formation based on

the laws of supply and demand, rather than through government interference. I hope to see this new model launched by the end of next year.

FR: Coming back to the modernization plans laid out in the Treaty you spoke of, can you provide further insights into what this Treaty will say about the future role of the government within the sector? IGOR MIRONOV: The modernization program ana-lyzes the current situation in the sector with regards to new and old infrastructure, as well as new equipment needed. The program will need to be passed by the government and needs to become a representative document.

Another aspect is the economic program, which relates to the capacity needed in this mar-ket. If we cannot attract investment, we will need the government to allow for regulatory changes and ensure mechanisms to support investment.

FR: The government’s Energy Strategy 2030 already foresees the need for up to $888 billion by 2030. In your view, is this an ambitious figure within such a short time span?

17

IGOR MIRONOV: This is an ambitious target indeed, but from an investment point of view, the Energy Strategy document is mainly directed towards the development of the sector. The money for these investments does need to come from some-where, however, and today’s markets do not allow for such sizeable amounts.

The government needs to take it step by step and decide on its priorities. This is a critical issue because we do not expect to see a very high increase in consumption in the next few years. We need to look at modernization in a realistic manner, and either provide companies with a way to make profits on the market that can be rein-vested, or alternatively provide economic mech-anisms to invest in modernization. We have already handed in a proposal for a modernization program to the Minister of Energy, but no deci-sions have been made so far.

In an ideal world, we would be in favor of a free market. We understand however that a cer-tain extent of control in such an important sec-tor, especially with regards to price formation, cannot be avoided. To be honest, a certain degree of control exists in every country in one way or another. Therefore, we must identify these mech-anisms to attract investment to the sector.

FR: Last year, CPP organized the 10th Professional Conference ‘New Russia. New Energy Technolo-gies’ in Sochi. What can you tell our readers about the key conclusions made by its participants?

IGOR MIRONOV: The CPP has traditionally organized these conferences as any other: an event that served as a communication platform and net-working opportunity, where everyone was wel-come. This format, however, never led to any tan-gible results for the participating companies.

In the last two years, we have therefore no longer invited the media and the different gov-ernment officials to this conference. Instead, the event focused mainly on the members that were part of our partnership. A platform emerged that enabled the different participants to discuss and solve their own specific problems.

When two stations were in close proximity of one another, for instance, facing the same prob-lems, the participants could more readily learn from each other’s experiences. The conference has therefore become more of a reunion of all the energy producers of the Russian Federation that come together to discuss all the different prob-lems they may face, from management to person-nel, production, and so forth. When people come together more freely, they communicate more openly and achieve better results together.

We need to look at modernization in a realistic manner, and either provide companies with a way to make profits on the market that can be reinvested, or alternatively provide economic mechanisms to invest in modernization.

18

Nikolai Alekseevich Karasev, PRESIDENT – FORENERGO

Interview with: Nikolai Alekseevich Karasev, president – Forenergo

INTERVIEW WITH:

Nikolai Alekseevich Karasev, president – Forenergo

Focus Reports: Can you define Forenergo’s current capacity and capabilities to meaningfully con-tribute to the modernization process of the Rus-sian power sector?NIKOLAI ALEKSEEVICH KARASEV: Forenergo is a young fifteen year-old company that started its production twelve years ago. Our main share-holders have backgrounds in the military. We currently have over 1,100 employees and a sales volume of around $100 million.

We have three different manufacturing areas: composite polymer isolators for substa-tions, fittings for low to high voltage power lines, and glass insulators. We promote differ-ent brands throughout these three product cat-egories.

Our motto is to provide comprehensive and optimal solutions to the power sector. Geo-graphically, we are present in different regions of the Russian Federation. We have a presence from the Urals to the European part of Russia, including the regions around Moscow, Nizhny Novgorod, Perm and Chelyabinsk.

FR: With just twelve years of production, the company seems to have fared rather well so far. Yet as a young company, you play in a market that hosts several traditionally strong Soviet era companies. How challenging is it to find your place in this market and capture some market share?NIKOLAI ALEKSEEVICH KARASEV: In the Soviet Union, there was one company uniting all the fittings factories, situated across the territory of the Soviet Union. In 1991, production vol-umes decreased to close to zero and many com-panies –especially the ones located in modern Ukraine that accounted for 75 per cent of the total capacity– suffered greatly. We thus entered the market at an interesting point in time, as many of these historic companies were still in times of crisis.

At the end of the 1990s, demand picked up once again. This required new levels of technol-ogies that many of the traditional companies

could not provide for. The new production area of isolated power lines emerged. The lacking supply, however, urged us to start in this area with our first products. The only competition we faced came from abroad. We started in the area of medium to high voltage equipment and already became one of the three largest manu-facturers within the first three years. In the area of glass isolators too, the market faces supply shortages. We invested significantly and today have a 6 per cent share of the world sales volume of glass insulators.

FR: A significant part of the Russian power sys-tem is indeed being modernized through so-called mega-projects; you already mentioned the 2014 Winter Olympics in Sochi. What type of business do you target as general director: a few of these mega-projects or a continuous stream of business?NIKOLAI ALEKSEEVICH KARASEV: Such projects are very interesting for us and we do all we can in order to make them contribute to the Russian power sector. However, we have now decided to rely on conquering Siberia and the Far East of Russia for our future growth path. This strategy has been developed and is of considerable impact from an economic point of view.

It is also worth noting that we have several assets in a number of large projects. For many years now, we have been supplying parts of new lines for Gazprom. Our participation is rather important, in particular as these lines are being produced according to our plans and products. Another example is the Transneft VSTO project in the Far East of Russia.

Forenergo has also engaged in joint model projects with other companies such as Rubius Group and Belselelektrosetstroy. How do they fit within these plans?NIKOLAI ALEKSEEVICH KARASEV: Both companies are very different from one another. The Rubius Group produces applied software for construction proj-ects. They sell programs for the automation of the

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planning and design phase of power lines. In essence, they make the work of designers easier. To sell their products however, they are interested in modern project solutions. Within this framework, they see a beneficial partner in Forenergo. With our products, we help this company to become more competitive.

Belselektrosetstroy –on the other hand– is one of the largest energy construction companies from Belarus. The company constructs both power lines as well as complementary products. Their factory manufactures different accessories and supporting products. We engage in cross-licensing with Belsel-ektrosetstroy: we help to sell their products in Rus-sia while they support the sales of our products in Belarus.

We also work with other large Russian compa-nies such as the Federal Grid Company (FSK). In such large companies, there are product develop-ment departments that work on both new products as well as supporting regulatory and legal docu-ments.

FR: Considering you are already active in the former CIS countries, do you have further international ambitions with Forenergo?NIKOLAI ALEKSEEVICH KARASEV: Within our company, we work with five year plans. Whereas we want to be active at an international level, we also under-stand our current limitations. Today, we unfortu-nately have limited products that are indeed suit-able for the world market. The main reason for this is the fact that the Russian market and the world market have different standards and requirements.

Nonetheless, our glass isolators are more suit-

able for such exports as the requirements for these products in Russia are more aligned with the ones for the international markets. Today, we are work-ing towards homologating our products to comply with European and world requirements.

Our glass isolators have already been tested in the Netherlands. Next year, we want to start with the ‘pilot supply’ of these products in twelve differ-ent countries. During the summer of 2012 for example, our Group sent a team to Africa to pres-ent our energy systems and solutions to 16 differ-ent African countries.

We invested significantly and today have a 6 per cent share of the world sales volume of glass insulators.

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Dr Alexei Sivderski, CEO – INTERAUTOMATIKA AG

Interview with: Dr Alexei Sivderski, CEO – Interautomatika AG

INTERVIEW WITH:

Dr Alexei Sivderski, CEO – Interautomatika AG

Focus Reports: As a young and emerging company, you evolved through a market that has changed drastically over recent years. Did the company have to align with the new market structure of the Russian power sector?DR ALEXEI SIVDERSKI: Interautomatika has been established twenty years ago, right when the changes started to occur. We are young but have been growing with this market from its very beginning, and are not stuck in an old regime or mentality. We are a market-oriented com-pany that focuses on the needs and opportuni-ties generated by the customers.

The reform has brought in several new mar-ket players on the generation side, some of which –such as E.ON– have excelled in the use of state-of-the-art technologies and efficiency levels. Has there been an accelerated need for automation?

Automation is objectively an essential part of the technological development of the world today, simply because automation is not an end in itself but the basis of efficiency, safety, and extension of life-cycle of power plants. At pres-ent, one cannot imagine a good combined cycle power plant (CCPP) or other modern power gen-eration installation without a high level of auto-mation. From my understanding, the industry has to move in this direction, thinking about automation. We have to consider the possibili-ties on the human resources market, the envi-ronment and safety levels.

FR: Siemens is a major shareholder in your com-pany and you offer their equipment in your proj-ects. How do you prevent brand dilution when approaching customers?DR ALEXEI SIVDERSKI: Having Siemens as the larg-est shareholder, we indeed have to use Siemens equipment as a core of our systems. However, automation is more than Distributed Control Systems (DCS) alone. We are a solutions pro-vider for the market and engineering is our added value. Even though we remain –and

should remain– connected to Siemens, Interau-tomatika is already a brand in Russia today.

FR: One of your biggest competitors is Emerson, a $24 billion conglomerate. How can you compete head-on with such a giant?DR ALEXEI SIVDERSKI: First of all, one should not focus too much on the size of his competitors. Instead, we focus on our own approach to solv-ing particular problems with our own solutions. Emerson, ABB and Siemens are well known companies, but we can differ in the solutions and approach to customers that we offer.

FR: Do you have particular examples to illustrate this?DR ALEXEI SIVDERSKI: At present, we have a sub-stantial share of combined cycle units auto-mated by our company. In Reftinskaya GRES –the largest coal-fired power plant in Russia– we finished a project in 1997 hosting the high-est level of automation in the country. Even for our German colleagues, this has been a good example of a successful project. Still today, this unit is running with all its automation func-tions in operation. This initial success has resulted in a new project to modernize Reftin-skaya GRES.

We now have a project with E.ON on the new construction of a 800 MW unit near Kras-noyarsk, in addition to the two other units we already modernized there.

We have also had a project in Armenia, where the old unit remained under conservation for nearly twenty years. Following the decision to change the technological structures, we have made upgrades towards the system with com-plete automation. This was a serious task as no new construction had been taking place there for a while. As a result, the power industry barely had qualified staff to complete this proj-ect. In order to address this problem, we created a special full-scope simulator to train the people onsite.

E.ON

E.ON

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FR: To what extent are you required to provide after-sales service as part of your contracts?DR ALEXEI SIVDERSKI: There are several levels of ser-vice. At customer level, relationships go beyond specific contract stipulations. Our company phi-losophy is to put our customer relationships before money and contracts. In Russia, unfortu-nately, the service market has barely developed. Because of constraints that customers may expe-rience (lack of qualified personnel, high cost of keeping inventory), this situation will inevitably change in the future. The customers will change their attitude towards doing everything in-house and will outsource service activities. If we provide the right solutions and equipment, our custom-ers will not have to tie up their resources in inven-tory and pay for extra staff.

Instrumentation and control, being at the first line of the world development process, at the same time is a conservative area of technology, which –once installed– should be able to stay operational for ten to fifteen years. Over time, however, customers want to see upgrades of their existing technologies, which can be part of ser-vice contracts. In general, such contracts are not yet embedded in the Russian business culture. It is my feeling that the customers psychologically are not yet ready for such approach, but as it was mentioned earlier this will change soon.

When we started with our activity twenty years ago, the automation market was also not yet developed. To a large extent, our company has contributed to develop this market through pub-

lications, seminars, presentations, and by our results. We have taken the task upon us to explain customers what benefits they can receive and what approaches are being used in the field of automation. Today, the market is developed and various competitors have entered the arena.

We have taken the task upon us to explain customers what benefits they can receive and what approaches are being used in the field of automation. Today, the market is developed and various competitors have entered the arena.

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Olga Dolgova, GENERAL DIRECTOR & ALEXANDER KARPOV, FIRST DEPUTY – KOMPLEKTENERGO

Interview with: Olga Dolgova, general director & Alexander Karpov, first deputy – KomplektEnergo

INTERVIEW WITH:

Olga Dolgova, general director & Alexander Karpov, first deputy – KomplektEnergo

FR: What is the positioning of “KomplektEnergo” in the nuclear power sector?ALEXANDER KARPOV: Our main client is “Rosen-ergoatom,” which is part of “Rosatom.” All of our contracts are either directly with them, or with one of their power plants. We currently work with eight out of the ten nuclear power plants in Russia, not counting any that are still under construction. At present, we are not working with the Beloyarsk and Bilibinskaya nuclear power stations. To all of the other plants, we either provide equipment or services.

One of our main partners is OJC “Tur-boatom” –from Ukraine– which is one of the biggest providers of turbines together with “Sie-mens” and “Alstom.” A second strategic partner of ours is the Czech company “Vitkovice.” They are an equipment manufacturer taking part in the entire manufacturing process: from the planning to the development and production. They mainly work with heat equipment. Our third strategic partner is the German company “Taprogge,” a provider of ball cleaning systems.

We also have a partnership with “Balcke-Duerr” –another German company– and are in the process of developing cooperation with a Spanish company called “CIC.” Besides those companies, there are also a number of other players we have worked with just once, with whom we are now intensifying our cooperation.

FR: From your perspective, how have you seen the competitive landscape evolving throughout the years and where does the industry stand today? From a strategic perspective, what is the competitive edge you also have today?OLGA DOLGOVA: The competitive landscape has been changing quite significantly. In the past, foreign companies would either not be able to get into this market or would not be willing to

try. Today, we see a changed situation with European producers making proposals to Rus-sian clients, studying their requirements and competing on this market. They are ready to comply with our technical and economical requirements. For instance, they certificate all the production in Russia and provide all the necessary documents. They are now able to pro-vide solid proposals. On the Russian front, the different players have started understanding their self-worth. Many of them have started lis-tening to the different technological solutions from these European players.

As for our competitive advantage, we have been able to promote equipment of Ukrainian, Czech and German production for the past ten years and will continue to do so. Today, we can offer quality services, have both a clear under-standing of the market and a competent techni-cal team to bring these services to market. We are able to formulate competitive proposals to reflect the interest of European and foreign pro-ducers.

We have also been involving Russian com-panies into our production processes through

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joint production –rather than joint venture– agreements. This has provided us the opportu-nity to work with Russian factories and produce quality products, particularly as quality and reli-ability are key words in this sector.

All of our programs and projects have been directed towards modernization to enhance reli-ability, increase production and extend the life cycles of equipment and plants. The projects we have been able to achieve in the last ten years altogether equal 500 MW, which is the equiva-lent of one power plant. We hope that we will be able to build our own small power plant in the next five years.

FR: You speak of joint production rather than joint ventures. Is the latter an option in the future though? How do you see the company’s model of cooperation evolving in the future?OLGA DOLGOVA: Joint partnerships are feasible but apart from our technical relationships with companies like OJC “Turboatom,” we are also developing our own products according to the current market requirements. We have started with the simple supply of equipment to a com-prehensive set of services today.

Recently in Russian and foreign mass media the news appeared that “KomplektEnergo” won a tender for supplying the turbines for the reac-tor unit SVBR-100. Please tell us more about this project.OLGA DOLGOVA: In February 2013 “KomplektEn-ergo” signed a contract with the government-private joint venture “Akme-engineering” to develop, manufacture and supply steam tur-bines and relevant equipment for both experi-mental and commercial units of the SVBR-100 reactor.

SVBR-100 is a lead–bismuth eutectic (LBE) cooled fast reactor. The project is being imple-mented within the framework of the Federal Target Program “New Generation Nuclear Power Technologies for 2010–2015 and Future Trends up to 2020” and it is one of the projects of the Presidential Commission for modernization and technological development of Russia’s economy within the framework of the “New technological platform: closed nuclear fuel cycle and fast-neu-tron reactors.”

Our company was chosen in 2012 as contrac-tor following open multiphase competitive

negotiations. Our partner OJC “Turboatom” will be the equipment manufacturing plant. We offi-cially represent their interests on the Russian market.

According to the terms of the contract, the finished turbine equipment is to be delivered to the construction site of the nuclear power plant with the SVBR-100 reactor (in the city of Dimi-trovgrad) in the first quarter of 2016, and is to be installed and commissioned in the first half of 2017. According to the current project imple-mentation timeframe, the launch of the power unit is planned for 2017.

Taking part in the implementation of this SVBR-100 project is a very significant step in the development of “KomplektEnergo”. The proj-ect is very attractive under many different parameters, from the cooperation with a fully-fledged government-private company, to the economic perspectives of the project and market demand for the small modular reactors under construction, ending with the large-scale man-ufacturing of SVBR-100 reactors.

In the past, foreign companies would either not be able to get into this market or would not be willing to try. Today, we see a changed situation with European producers making proposals to Russian clients, studying their requirements and competing on this market.

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Aleksandr Evgenevich Yushin, GENERAL DIRECTOR – ORGRES

Interview with: Aleksandr Evgenevich Yushin, general director – ORGRES

INTERVIEW WITH:

Aleksandr Evgenevich Yushin, general director – ORGRES

Focus Reports: During the 1990s, the Russian engi-neering sector suffered from the breakup of the former Soviet Union. Do you feel that some of the old skills in the country have been lost?ALEKSANDR EVGENEVICH YUSHIN: We have lost some of our positioning but not to a level of reaching a full stop. In my view, the country regained its competences in the years 2000. Today, Russia has engineering experts of a very high level.

Our company –and others– now have expert engineers with experience from the Soviet times, as well as others that have been trained in the 1990s or the years 2000. We see three categories of experts: the more experienced ones, the mid-dle category and the new generation. Amongst our staff, we find all three of them.

You have a background in electrical engineer-ing from the Ivanovo State Energy University. Based on your own experience, are there differ-ences between these categories in the way they approach engineering problems?

Experience is very important and is obtained by working directly in power facilities. While the young generation of engineers can provide good solutions, it are the experienced ones that should form the basis of a company. The best solution will always be a middle way that is able to com-bine the best of all worlds.

FR: This year ORGRES turns 80 years old as a com-pany. How would you describe the company’s rep-utation in the sector?ALEKSANDR EVGENEVICH YUSHIN: We have a very strong reputation today and hold contracts in various countries around the world, such as India, Bulgaria, Canada, Cuba and Iraq. Our experts have the highest qualifications. Our cli-ents have always been satisfied and no claims have been received, which is also a confirmation of our standing in the market.

Has the international aspect always been important? As the new general director, how important is it also for you to look at business opportunities beyond Russia (which in itself

already presents an enormous market)?These international projects are testament to

the brand that ORGRES represents. They give us the possibility to see how competitive we are on foreign markets and help us understand how we can compete in the market of engineering ser-vices with new competitors from China, India and other countries. Overall, they help us to understand our place in the market and identify our strong and weak points as an engineering company.

FR: When you were appointed general director in September 2011, what was your assessment of the company’s strong and weak points?ALEKSANDR EVGENEVICH YUSHIN: A strong point lies in the personnel we have. Our engineers have extensive experience in the sector for 30 to even 40 years. This enables us to solve any task of the highest quality and on time.

On the downside, times have been more dif-ficult since the dissolution of the Soviet Union when our company lost a lot of personnel. Today, we try to bring back the competences we lost by recruiting more personnel of the highest quality/ qualifications.

FR: What measures are you taking to do so?ALEKSANDR EVGENEVICH YUSHIN: We do market research for the specialists we are interested in, based on their experience and competences. We also work very closely with institutes such as the Moscow Power Engineering Institute and the Ivanovo State Energy University. We keep a close eye on the graduates from the speciality fields we are particularly interested in.

FR: The Energy Strategy 2030 of the government contains strong growth estimates for the hydro-power and nuclear power sectors in particular. Do you favor any sectors when you look for new business?ALEKSANDR EVGENEVICH YUSHIN: If we compare these two sectors, then we are more present in

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the hydropower sector. We therefore concentrate on the hydropower sector where we work closely together with Rushydro, TGK-1 and Irkutsken-ergo. We also plan to participate in the recon-struction of a hydropower plant in Uzbekistan. We soon intend to widen our range of services, including a partnership with “Rosenergoatom”.

FR: Some of these companies are highly focused on automation – set to play an important role within the modernization process of the Russian power sector. What is the biggest challenge for Russian power companies to move towards more auto-mated processes? Is there a reluctance from engi-neers to work with more modern equipment, are the right technologies not readily available, are there financial constraints, are do other factors come into play?ALEKSANDR EVGENEVICH YUSHIN: The Russian energy sector has always gone its own way, but the level of automation needs to be driven by economic feasibility. Today, any facility can be launched at the push of a button and Russia has the technol-ogy to do so too. The equipment that is being used for this in Russia is being produced in Europe or the US.

All of this foreign equipment has its own auto-mation systems however. For gas turbines, pumps, and similar equipment, we all use our own automation systems. The algorithms of the equipment are not being shared so linking every-thing together becomes quite the challenge. For them, it is easier to sell something unknown.

FR: In the roughly 1.5 years as general director of ORGRES, what has been your main priority? ALEKSANDR EVGENEVICH YUSHIN: Lately “Firma

Orgres” has widened its range of services and is developing areas such: energy inspections and energy equipment testing, incresing energy effi-ciency, technical and economic documentation, normative and technical documentation, manu-facturing and delivering equipment.

Today we are actively developing our commis-sioning works division, on energy units of heat power plants.

For example, we have successfully assembled a generator and the excitation system on Unit 7 at the Novocherkassk district heating plant and we continue working on Unit 4 at the Yuzhno-Sakhalinsk heat power plant.

A strong point lies in the personnel we have. Our engineers have extensive experience in the sector for 30 to even 40 years. This enables us to solve any task of the highest quality and on time.

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Alena Rybushkina, CHAIRWOMAN – NP HYDROPOWER

Interview with: Alena Rybushkina, chairwoman – NP HYDROPOWER

INTERVIEW WITH:

Alena Rybushkina,chairwoman – NP HYDROPOWER

Focus Reports: Since 2004, the NP Hydropower has been rather active through diverse initiatives by supporting R&D initiatives, enhancing the exchange of information, and so forth. In hind-sight, what makes you the most proud of what has been achieved by the Partnership to date?ALENA RYBUSHKINA: To date, all of our efforts and projects have been directed towards increasing the reliability and effectiveness of the sector in order to enjoy greater use of the country’s hydro potential. We target both large projects as well as more local ones, which target more current and local issues.

Looking back, there are three areas that jump out. The first is the creation of a document called the ‘Forecast of the Growth in Hydro-Electric Energy until 2020, with a Look into 2050.’ This document has been compiled by leading hydro-experts from 2007 onwards. This outline has not only been important to identify how we should use our potential and what areas require invest-ment, but also to highlight the sector’s needs in terms of resources such as equipment and people management.

Our second key project was the creation of a system for technological regulation. Law 184 defines the rules and regulations of the sector in Russia, and is a law that the Council has been working on since its creation. Namely, one of our priority areas is the creation of standards. We have been tasked with this responsibility by RAO UES in the past and companies such as RusHydro today.

During this work we came to the conclusion that many issues have to be standardized at the industry level. Following our methodological approach, the result in 2010 was a ‘concept for technological regulation in the hydro-sector.’ The concept has been agreed upon by all the members of our partnership and later applied to the entire energy sector by the Ministry of Energy. This year, we went even further with the creation of the document “Standardization at hydropower organizations. Standards of organization. The

rules of construction, description, design and notation”. With this, we took a general concept more and more specific in terms of its technical aspects. In this document, we went into much greater detail to support a harmonized approach by all the different hydro companies.

The third area of work has been the regulation of assets, resources and equipment. This includes the facilities themselves, i.e. the hydropower plants. More than 20 per cent of the equipment in Russia has an operational life of more than fifty years. It is therefore very important to address issues with regards to their residual operational life. Due to partnership request the method of evaluating of the residual life of the mechanical equipment was developed. We con-tinued our work in this area from 2010 onwards, particularly on hydro turbines. As a result, we have developed a document that includes criteria for safety for instance. All of our members already use this document now. This is an area that our Partnership alone has been working on systematically and remains a complex task due to the unique features of every hydropower plant.

FR: The Partnership seems to be quite outward-looking, working together with entities such as the International Hydropower Association. To what extent can you also align your efforts in cre-ating all these different documents with what has been done abroad?ALENA RYBUSHKINA: We work with two main inter-national organizations: the International Com-mission on Large Dams (ICOLD) and the Inter-national Hydropower Association (IHA). The NP Hydropower is the official supporting organiza-tion of the ICOLD to the Russian National Com-mittee. We thus provide support to the members of the committee and participate in all their events. In this way, the international community can hear firsthand about the situation of the hydro sector in Russia.

Our Partnership is also very interested in pro-

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viding access to these international entities to all of our members and we do so by providing and translating bulletins and reports. We provide this access through our portal which we have set up in 2010. Since then, we have translated more than thirty bulletins that talk about the most current issues in the sector.

Further to that, we have been a member of the IHA since 2010 and take part in all communica-tion platforms of the organization. Since then we have also been working on a document that deals with sustainable development – “Hydropower Sustainability Assessment Protocol” In partner-ship with RusHydro we have worked on the trans-lation of this document which is now in its test phase in some of RusHydro’s plants.

FR: All these documents can be looked at from dif-ferent perspectives by different entities in the value chain: government, consumers, producers, retailers, equipment providers, etc. Consumers, through their own association, have previously raised concern over lacking involvement in the sec-tor. Have certain steps been taken to include them in the development of the framework and policies of the hydro sector in Russia?ALENA RYBUSHKINA: This is a matter that does not only relate to specific hydro-issues, but also the development of entire regions. The large projects of RusHydro, for instance, do not look at only one investment, but at the development of an entire region, such as Siberian and Far East region. In such project, all the large consumers – such as aluminum producers – are being taken into account. The territorial approach allows us to get closer to consumers and other stakeholders.

FR: Apart from RusHydro, you still have around 10 other members in your Partnership. This now even includes EPC companies such as Rakurs. Going forward, how do you see your membership base developing?ALENA RYBUSHKINA: At the time the Partnership was created, the main idea was to include gener-ating companies only. Afterwards, however, we understood that other stakeholders needed to be included as well, such as construction and research companies. For this reason, we have changed the statute of the Partnership in 2010 to allow for other organizations related to the hydro sector to enter too.

FR: Looking 5 years ahead into the future, what will the NP Hydropower then look like?ALENA RYBUSHKINA: A key focus area will be our membership base, as we will try to include orga-nizations taking part in all the different stages of the lives of hydropower plants. At the same time, we also want our Partnership to become a platform to exchange ideas and build dialogues between different organizations, notwithstand-ing their current activities.

The ‘All Russian Hydropower’ of 2005 is an example of an event where more than 300 to 400 representatives came together to discuss their issues and find solutions together. In this event, we saw the participation of all kinds of companies of different sectors of our field. The next such event will be taking place next year.

In the coming years, we will be focusing on two key areas: creating standards and supporting research to address common issues of the sector. We aim to make all this knowledge easily avail-able for our professionals, which is why we will also be working on an electronic library.

In the coming years, we will be focusing on two key areas: creating standards and supporting research to address common issues of the sector.

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Jack Neushloss, HEAD OF THE ELECTRIC POWER SECTOR – SKOLKOVO BUSINESS SCHOOL ENERGY CENTRE

Interview with: Jack Neushloss, head of the electric power sector – Skolkovo Business School Energy Centre

INTERVIEW WITH:

Jack Neushloss, head of the electric power sector – Skolkovo Business School Energy Centre

Focus Reports: Mr Neushloss, prior to joining the SKOLKOVO Business School Energy Centre’s team you spent decades working in Poland, Hun-gary, Canada, Mexico, South Africa and Central Asia. What surprises you most about the Russian power market? JACK NEUSHLOSS: After many years with a large utility company I started working for a British law firm—CMS Cameron McKenna, one of the few that have been deeply involved consulting the power industry all over the world since the early nineties. The firm hired me as a former utilities executive to serve as a link between industry and legal professionals. Starting with the restructuring and privatisation of the power sector in England and Wales the firm has been significantly involved in the restructuring of the power sector all over the world, in many different jurisdictions.

What was unique in Russia – as opposed to other jurisdictions where I have operated – is that the initiative to reform the industry did not come from the government but from the management board of RAO UES – the electric-ity monopoly at the time– itself. As far as I am aware, this has been the only case in the world where such initiative did not come from the gov-ernment.

For many reasons, governments and inter-national agencies such as the World Bank or the International Monetary Fund (IMF) review the functioning of the power sector, a move many utility companies generally oppose. In Russia, however, it was exactly the opposite, where the Chairman of the Management Board of RAO became the main driver of the reform.

You had been advising former RAO-UES on a wide range of issues relating to the Russian

electricity market reform, including market model, market rules, contractual structure and regulatory regime. What is your view on the outcome?

As usual, some things have succeeded and some have not. What definitely succeeded is the structural change—splitting the company into generation, transmission, distribution and sup-ply. The market that has been created is subop-timal, yet shows all the features of a competitive market. From an historical perspective, the entire reform can definitely be considered as a major success.

FR: At the XII International Scientific-Practical conference held on 15-20 May 2012 in Barcelona, you stated that “the structure of the electric power sector is not adapted for the integration of small size generation”. Can you explain this statement further? JACK NEUSHLOSS: There are many factors which hamper the development of distributed genera-tion. One of the major factors is the issue of cross subsidisation—customers who build their own power stations stop buying power from the

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grid or at least significantly reduce such pur-chases. As a result, the revenues of distribution companies and centralized generating compa-nies drop and thus contributions to cross-sub-sidisation diminish.

The reasons why certain consumers are mov-ing in the direction of distributed generation are not difficult to find out. Tariffs – specifically in distribution – have grown in the last several years quite significantly, affecting profits of cus-tomers and creating an unpredictable future. Changes in legislation are also frequent, adding on to this level of uncertainty.

Moreover, any change in capacity required from the grid by a customer usually results in additional payments of connection fees, which can be quite sizeable. Generating one’s own power therefore provides better flexibility due to a lesser dependency on the grid companies.

Another incentive for consumers to generate their own power is the frequent power interrup-tions caused by atmospheric disturbances such as floods, ice rain, high winds, etc. For shopping centres, manufacturers, data storage centers and the likes, the switch to own generation close by enhances security of supply.

In addition, there is even some movement on the residential side too, with home owners now installing micro turbines. Once again, the underlying motivation is security of supply and difficulties in obtaining a grid connection.

In my opinion, in order to increase security of supply it would be necessary to review the standards of design and construction of grid assets and facilitate development of distributed generation.

FR: According to the State Duma Energy Commit-tee, electricity tariffs have increased drastically in Russia ever since the reform: 12 times. From a consumer perspective, what do you see as an acceptable growth rate in tariffs for the coming years? Should they be worried?JACK NEUSHLOSS: No consumer likes tariff increases, so the question from a consumer’s point of view is actually self-evident. If one goes a bit deeper in analysing what the real reason for these tariff increases, however, the conclu-sion will be that market prices for energy so far are tolerable.

Generating companies raise concerns about

the cost of fuel and decreasing profits. Here com-petition more or less works. Prices for transmis-sion –and specifically distribution on the other had – have been skyrocketing. Bear in mind that all tariffs for using the grid are state regu-lated. The transmission tariffs, for instance, are regulated by the Moscow-based Federal Tariff Service. Distribution tariffs of the local distri-bution companies are in turn regulated at a regional level.

Experts ascribe the growth of grid tariffs to a number of reasons. Some claim that the pri-mary reason behind the growth is a change in the methodology to calculate the allowed rev-enue for these companies. The government has changed its “Cost Plus” system to the so-called “Regulated Asset Base (RAB)” system; an Amer-ican terminology. This change was one of the reasons for tariff growth. Other reasons are also mentioned.

The situation reached a stage where in certain regions prices for transmission and distribu-tions started to exceed those for generation, which is absolutely wrong.

The market that has been created is suboptimal, yet shows all the features of a competitive market. From an historical perspective, the entire reform can definitely be considered as a major success.

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Ed Verona, PRESIDENT AND CEO – US-RUSSIA BUSINESS COUNCIL

Interview with: Ed Verona, president and CEO – Us-Russia Business Council

INTERVIEW WITH:

Ed Verona, president and CEO – Us-Russia Business Council

Focus Reports: For four and a half years now, you have been the president and CEO of the US-Russia Business Council. What have been your main pri-orities in this period?ED VERONA: In terms of improving US-Russia trade, our key priority has been to assist –in any way we could– Russia’s accession to the World Trade Organization (WTO). When I assumed my position it was not at all clear that this journey would have a successful outcome. There were many impediments, both with regards to the accession package as well as the geopolitical sit-uation – such as the conflict with Georgia.

The negotiations were very intense, address-ing issues such as intellectual property rights, phyto-sanitary standards, non-tariff barriers, dispute resolution processes, adherence to the Information Technology Agreement, etc. These negotiations were particularly important vis-à-vis the disappointment of some of our members with China’s WTO accession. Many of them felt that China’s accession package was insufficiently robust back when it was adopted in 2003. Rus-sia’s accession process required longer delibera-tion in order to ensure that it addressed all pos-sible concerns.

Another factor that stretched the process out by another year was Russia’s decision in 2009 to suspend its WTO negotiations and conclude a customs union with Belarus and Kazakhstan. The changes this brought about had to be reflected and edited back into the WTO docu-ments that had already been agreed upon.

Once Russia became a member of the WTO, the U.S. needed to extend permanent normal trade relations (PNTR), or most favourable nation (MFN) status, to Russia. That occurred in December 2012 and, as a result, U.S. companies now enjoy the benefits that Russia’s accession provides.

In addition, we have been keeping our mem-bers abreast of what has been happening in other areas, such as the prospects for a Bilateral Invest-ment Treaty. Now that the WTO accession has

been accomplished, there is a better chance of negotiating such a Treaty.

FR: You mentioned in a recent statement that “the WTO membership is not without its critics in Rus-sia. Some industries fear the foreign competition that the opening will bring.” What counterargu-ments can you give them?ED VERONA: We should not deny companies the opportunity to compete on a level playing field. Whether people are for or against this agreement no longer matters, because the official accession has now taken place. Companies that spend their time trying to protect their business from com-petition fail to do the things they need to do to be competitive.

As an example, one of the best things that happened to US automobile manufacturers was competition from foreign companies – mainly Japanese. It forced them to be more competitive and turned them into stronger companies, pre-cisely because they have developed models that are more globally competitive. Today, American automobiles are second to none and very success-ful in Russia.

The audience that still needs convincing –per-haps– is the broader Russian public. They must understand that Russia needs to belong to the WTO to be attractive to investors. Most multi-national companies do not look at markets as individual countries, rather as regional or global markets. They scale plants to serve more than just local markets. Consequently, if a country does not belong to the WTO it is unlikely to be considered suitable when a potential investor is seeking to build a global supply chain.

To Russian consumers, one can argue that they have been paying substantially higher prices on imported consumer goods. WTO accession is going to bring prices down over this transition period. People tend to overlook the benefit of lower prices that comes with trade liberalization, focusing instead on the handful of industries that cannot compete in a global marketplace.

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FR: The Russian President has made it clear that the country’s economy should decrease its depen-dency on its the oil and gas sector. As the Russian economy diversifies, how will this impact its trade balance with the US?ED VERONA: Over the last ten years, Russia’s depen-dency on the oil and gas sector has increased; it now accounts for roughly two thirds of foreign exchange revenues, half of federal budget reve-nues and about a quarter of GDP. This exposes the economy to volatile commodity price cycles.

However, it does not mean that abundant nat-ural resources have to be a “resource curse,” as some call it. There are examples of other countries that rely heavily on primary commodity exports that have prospered, such as Norway, Canada and Australia. Even Brazil –which continues to rely predominantly on primary commodity exports– has done very well at developing high value-added export industries. More importantly, the country shifted from being an importer of oil in the past to an exporter of oil today. The country has done very well at developing advanced oil pro-duction technologies –deepwater, ultra deep water, etc.

The paradox for Russia is that when oil and gas prices are on the upswing they put upward pressure on the ruble, which in turn hurts the competitiveness of manufacturers. Natural resources give Russia a competitive advantage and weight in the global economy, but at the same have made it harder to grow other industries. Policymakers need to put into place the right laws and regulations to encourage the growth of other sectors. In my view, there is still a lot of work to be done around transparency and corruption, bureaucracy, etc. More work is required on what is broadly referred to as rule of law, such as an independent judiciary, competent judges on com-mercial legislation, intellectual property, respect-ing contracts, etc.

FR: After RAO-UES, the power sector has been restructured. Has the paradigm of opportunities in the Russian power sector changed for your members in recent years?ED VERONA: It certainly has been important for companies manufacturing goods or providing services to the sector. There is a need to increase substantially power generation capacity in Rus-sia, and the sector has suffered from underinvest-

ment in recent years, which is problematic for an economy that is growing strongly in energy-intensive areas.

From my personal understanding, a few spe-cific issues have complicated investment in the sector. One major issue is the absence of a reliable market for balancing long-term gas contracts and spot demand. Electric utilities need to be able to negotiate stable long-term sales contracts that have effective mechanisms to ensure a viable rate of return and incentives to lower the cost curve.

At the end of the day, many of these issues boil down to managing risk and achieving a rea-sonable rate of return on investment. There may be a role here for multilateral or bilateral invest-ment guarantee agencies, such as OPEC, EBRD, etc. Such entities could help bridge the confidence gap by providing an additional guarantee or an equity stake to ensure that the necessary rules and regulatory framework is both fair and prop-erly enforced.

Once Russia became a member of the WTO, the U.S. needed to extend permanent normal trade relations (PNTR), or most favourable nation (MFN) status, to Russia. That occurred in December 2012 and, as a result, U.S. companies now enjoy the benefits that Russia’s accession provides.

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Igor Vladimirovich Kotov, GENERAL DIRECTOR – ZIO-PODOLSK & ZIOMAR

Interview with: Igor Vladimirovich Kotov, general director – Zio-Podolsk & Ziomar

INTERVIEW WITH:

Igor Vladimirovich Kotov, general director – Zio-Podolsk & Ziomar

Focus Reports: In 2012, the company increased its revenues to R11.7 billion. Was this a satisfying first year for you?IGOR VLADIMIROVICH KOTOV: It was indeed a positive and satisfying year. More than the revenue increase alone, we have been able to strengthen the relationships with our partners and take back some of the markets we had previously lost. In sum, we successfully completed the manage-ment tasks that had been laid out before us.

FR: Your profits, however, were pushed down as you started a significant investment program, the key focus areas of which were equipment, infra-structure and energy savings. Why do you prior-itize these areas and how will these benefit the company?IGOR VLADIMIROVICH KOTOV: It is true that our prof-its were not as expected, mainly because of this investment program which amounts to roughly R6 billion for the next 5 years.

These investments will contribute to the fur-ther development of ZIO-PODOLSK. It is correct that a large part of these investments will go towards infrastructure. Our company has a great legacy dating back to 1919, which unfortunately also implies certain depreciation of our facilities. Therefore, we will be changing and renewing some of our infrastructure, partly by buying new equipment from foreign manufacturers and partly by modernizing the existing equipment.

FR: Will this result in more production capacity?IGOR VLADIMIROVICH KOTOV: By modernizing our production facilities and implementing these changes we mainly expect to see a 15 per cent decrease in production costs. This does not auto-matically increase our volumes, as these will still depend on the market situation. While modern-ization will allow us to increase volumes, the actual volumes will still depend on real market demand. If we manage to increase our customer

base, we will certainly achieve greater volumes.

FR: Opinion leaders such as Kirill Komarov, Dep-uty General Director of Rosatom, have shown optimism about the state of the nuclear power sector. Others speak of a so-called ‘nuclear renais-sance.’ How optimistic are you?IGOR VLADIMIROVICH KOTOV: With twelve steam gen-erators coming on stream, I do also believe that we can speak of a nuclear renaissance and that the ‘Fukushima-effect’ has come to a halt. Nuclear orders continue to make up for 60 per cent of our revenues, in addition to our business in thermal power and oil & gas.

FR: What will we mainly see happening in 2013?IGOR VLADIMIROVICH KOTOV: Until 2015, major of our nuclear orders have already been put in place. As for our business in thermal, our priorities lie in winning the tender in India and entering the Ukrainian market.

FR: The thermal power sector has seen an inflow of investments in new capacity in recent years, while a new phase of upgrading existing facilities is now starting. What are your observations of these developments and their impact on ZIO-PODOLSK and ZIOMAR?IGOR VLADIMIROVICH KOTOV: Our main client is INTER RAO, with whom we are building two units at the South Urals Thermal Plant together.

Our license agreement with the Dutch company NEM – which produces some of the best boilers in the world – is very competitive.

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The end of the “Dogovor o Predostavleny Mosh-nosty” or DPM Program ––a government mecha-nism to stimulate investment– is obviously resulting in a decrease in volumes.

Nonetheless, even if additional construction is not taking place soon, the current rate of depre-ciation will be leading to an increased volume in modernization works. We are ready to support such developments. I have now also taken over as general director of our engineering company ZIOMAR, and ready to participate in the sector’s shift towards modernization and increased effi-ciency.

In addition to the Russian market, we are also looking at other markets outside of the Russian borders, such as Kazakhstan and Ukraine. Fur-thermore, we have entered into a licensing agree-ment with NEM – a leading Dutch engineering company. Together we are studying the different markets in which we can cooperate, such as the Middle East or South Africa. We are also opera-tional in India through our collaboration with Ansaldo. In relative terms, we estimate that most of our growth will be coming from the interna-tional markets.

FR: What are the benefits of consolidating the management structure of these two companies?IGOR VLADIMIROVICH KOTOV: One cannot only man-age costs through equipment procurement strat-egies, but also through different engineering solutions. We have already felt the effect of uni-fying both of these areas. Unlike ZIOMAR, ZIO-PODOLSK is a more resourceful organization with the capacity to invest in scientific develop-ment for new prospective products and technol-ogies. Because of these investments, we also have an increased interest in controlling the entity, which is a huge step forward for us. This will, however, not imply a merger of the companies.

FR: You spoke positively about international growth. What makes you competitive outside of the Russian borders?IGOR VLADIMIROVICH KOTOV: Our license agreement with the Dutch company NEM – which produces some of the best boilers in the world – is very competitive. Of course, these products are not fully Russian but we fully understand the tech-nology and have successfully deployed it at sev-eral plants in Moscow for instance. At the same

time, we continue to invest significantly in the modernization of our facilities and the acquisi-tion of new equipment. I have not seen any other thermal equipment manufacturer with the same investment program as ZIO-PODOLSK. Several international equipment providers – for instance from Germany, Italy, Spain and Sweden – now turn to us. With our new equipment, our coal boilers and our partnership with NEM, we are fully competitive.

FR: What will be your biggest challenge for the coming years?IGOR VLADIMIROVICH KOTOV: In our line of business, there is a different challenge every day. This year, however, infrastructure remains our priority. We plan to make our manufacturing facilities more compact and more efficient. These modernization plans obviously need to take place during the summer, which only gives us a few months to bring them to successful completion. From May to September, I will have to act more as a contrac-tor than a general director, so to speak.

At the same time, we continue to invest significantly in the modernization of our facilities and the acquisition of new equipment.

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Evgeny Dod, CHAIRMAN OF THE BOARD - RUSHYDRO

Interview with: Evgeny Dod, Chairman of the Board - RusHydro

INTERVIEW WITH:

Evgeny Dod, Chairman of the Board - RusHydro

Focus Reports: The global energy mix is changing. The world is diverting from oil and gas and increasingly focusing on cleaner and renewable sources of energy. How do you now see the global perception towards hydropower and what do you identify as the current trends in the sector?EVGENY DOD: The global hydropower sector is expe-riencing a number of interesting trends. I am convinced that hydropower plays a very impor-tant role within our global society. Lately, numer-ous experts have stated that the construction of large hydropower plants (HPPs) and the use of renewables will play a key role in the 21st cen-tury. It is important that during the 6th Inter-national Water Forum the World Bank – which is one of the main partners in hydropower – underlined the role of new hydropower projects as the basis for sustainable development.

One cannot look at hydropower in a vacuum; it is not a matter of energy alone. For instance, the construction of large hydropower facilities is also important from the point of stable water supplies, which are crucial for instance in regions like Africa and Central Asia. Moreover, large water basins and water course regulation also offer security, and may protect against floods. The hydropower sector can provide comprehen-sive solutions to develop the living environments of people around the world.

One should also be aware of the fact that hydropower is not only about HPPs; there are also other sources such as tidal energy and pumped storage. Technological progress in these areas has now reached the state-of-the-art level. Moreover, capital expenditures (CAPEX) levels in hydropower have now decreased which made such projects more viable from commercial point of view.

FR: You took over the leadership of RusHydro together with a number of top managers from INTER RAO UES at the end of 2009, when both

Russia and the world were going through a tran-sitional phase. Internationally, the world was fac-ing the midst of the global financial crisis while in Russia, the power sector was still going through a phase of transformation. At the same time, your arrival took place only a few months after Rus-Hydro experienced a serious incident at its Say-ano-Shushenskaya HPP. Have these first three years been an opportunity for RusHydro to have a new start?EVGENY DOD: Exactly after three years, we can cer-tainly draw a number of conclusions today. Our main task in November 2009 was to deal with the consequences of the Sayano-Shushenskaya HPP incident, a task that has been carried out successfully. We have set a fast pace of recon-struction and renovation of the plant. It will be accomplished in 2014. The number of new proj-ects is also unprecedented: 4,000 MW of new capacity will be commissioned in 2012, and 10,000 MW more - by 2015. These are unique volumes for the hydro sector in Russia as well as in the Soviet Union.

We are also carrying out successfully a pro-gram of modernization of our existing plants. We are planning to invest roughly USD 10 billion in this program with expected dates of comple-tion within the next ten to fifteen years. This modernization process is unique in the world. It

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allows a full renovation of all RusHydro HPPs and enhances the reliability and efficiency of our plants. I am convinced that our company will complete this task fruitfully.

Considering that only 20 percent of Russia’s hydro resources have been developed to date, the potential for the future is significant. HPPs can be considered as a stimulus for growth of regional industrial clusters. For example, we are now at the commissioning stage on Boguchanskaya HPP with installed capacity of 3,000 MW. It is the basis of the Angara river region development. Now we are working closely together with Rusal on the construction of aluminum plant with the capacity of 600,000 tonnes of aluminum. For cer-tain regions such as Northern Russia, Northern Canada, Brazil’s Amazon region, Central and Western China, low cost energy through hydro-power can certainly be the engine of industrial development.

FR: To investors you have announced great poten-tial for the Far East of Russia. Can you elaborate on the expansion strategy of RusHydro there?EVGENY DOD: RusHydro’s expansion strategy is mainly focused on Russia. When the government decided to provide us the assets of RAO UES of Far East, around 9,000 MW of installed capacity and several networks in that region were added. We are working at synchronization of our invest-ment programs with the construction of compre-hensive infrastructure in Siberia and the Far East. We now have expansive investment projects towards the modernization of the energy sector and the construction of new facilities in that region.

While our priorities clearly focus on Russia, we do have some international projects too. Today, we own the 561 MW cascade HPP in Arme-nia and also have a cascade project lined up in Naryn, Kyrgyzstan. Our project institutes are also working on projects in India, Vietnam and Africa. We also believe in significant potential for tidal energy in Chile and Argentina. Whereas we would be keen on working in Europe, the lim-ited potential there has urged us to look at other parts of the world, such as Africa and Latin Amer-ica. We are now analyzing different opportunities outside Russia first of all as a contractor. When doing so, we will carefully enter those projects taking all possible risks into consideration. Our

construction experience in Russia and our back-ground at INTER RAO UES will enable us to be very competitive.

FR: Anyone looking at Russia may first think of oil and gas rather than hydropower. How difficult is it for a Russian flagship company to sell the idea of clean energy abroad?EVGENY DOD: Russia is a unique country and we are fortunate to have such large reserves of hydro-carbons. As a nation, we are certainly focused on using oil and gas as energy sources. These hydro-carbons are cheaper to use and consumers are still unwilling to pay for more expensive energy from wind, solar and biofuels. Our consumers are not yet ready to pay these higher tariffs simply for the sake of the environment. As a result, the returns for companies operating in such sectors have also not been attractive. The Russian gov-ernment has now put programs in place to increase the share of renewables up to 4 percent soon. We now also have programs in place for the construction of smaller distributed energy from wind energy or HPPs with installed capacity under 25 MW for instance.

As a company operating in the area of renew-ables, we try to effectively push these initiatives in Russia. This does not only include hydropower, but also geothermal and solar energy. While this is not easy, Russia is also not an island: the global trend will soon arrive in Russia too.

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Kirill Komarov, DEPUTY GENERAL DIRECTOR GLOBAL BUSINESS DEVELOPMENT - ROSATOM

Interview with: Kirill Komarov, Deputy General Director Global Business Development - Rosatom

INTERVIEW WITH:

Kirill Komarov, Deputy General Director Global Business Development - Rosatom

Focus Reports: Russia has a rich history in nuclear expertise dating back to the Soviet times. How important is this ‘heritage’ in your current efforts to take Rosatom global?KIRILL KOMAROV: The history of the nuclear sector in Russia dates back to 1945, which means that we have been developing this sector for 67 years now. We have built up strong expertise during Soviet times, but do not stop there as we continue to develop our capabilities in this area.

Today, Rosatom is one of the biggest global players in this sector in the world. In numbers, we are already the number one in the world in terms of uranium enrichment, with a global share of around 41 percent. As for the construction of nuclear power plants (NPPs), we are also the num-ber one in the world. We have a portfolio of proj-ects to build more than 30 blocks of nuclear power plants in Russia and abroad. Compared to China, this is about 5 blocks more. Moreover, in China these projects are being run by two companies.

In terms of uranium reserves, we moved from the seventh to the second place in just a few years, thanks to our global presence and several assets around the world. If these numbers do not explain the scope of our company, it is worth mentioning that we also own around 20 percent of the ura-nium reserves of the USA, through our Canadian subsidiary Uranium One Inc. As for nuclear fuel, we are currently number three in the world, own-ing 20 percent of the world share. To keep up with these numbers, there is obviously still a lot of work to do today.

To carry out this work, we do not only rely on our Soviet heritage, but also build on new tech-nologies. In this regard, we invest 3.5 to 4 percent of our annual revenues into new technologies. This allows us to keep our leadership position in the market.

FR: 2011 was indeed a good year. Despite the global economic crisis and despite the Fukushima disaster

in Japan, you managed to nearly double the num-ber of overseas orders: from 12 at the start of 2011 to 21 at the end of the year. How do you explain such strong performance from Rosatom, despite this challenging external environment?KIRILL KOMAROV: These numbers are indeed correct and can be explained as follows. The Fukushima disaster, first of all, did not have a significant impact on nuclear energy worldwide. At a meeting in September 2012 at the International Atomic Energy Agency (IAEA), there was a consensus among all countries taking part in the meeting that the decrease in the construction of NPPs until 2030 has only been impacted by ten percent.

We see that the only countries showing inten-tions to stop building NPPs, were not very serious about their nuclear plans before the incident in Japan. Germany today, for instance, has about 27% share of nuclear energy, yet did not have any plans to build new nuclear plants before the inci-dent at Fukushima took place. The discussions –before and after Fukushima– have always been about the schedule to close down their NPPs. In Italy, there are no existing plants and there have never been specific plans to move in the direction of constructing new NPPs. As for Japan, we under-stand that no final decision has been made with regards the closure of their existing NPPs. Despite rumors and public press statements, most inten-tions spoke of a ‘reduction,’ while no specific deci-sions have been taken so far.

At the same time, those countries that are the current drivers of global economic growth –India, China, Russia, Southeast Asia, Turkey and the Arab world, Latin America– they have confirmed their plans to build new NPPs. This is a current issue for Europe too, where we see very important projects in the United Kingdom and Central Euro-pean countries including the Czech Republic, Slo-vakia and Hungary. Also in France there is a con-tinuous interest in this sector. Another very important event has been the fact that the USA

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–for the first time in twenty years– has obtained a new license to build a new NPP. This implies that nuclear energy remains relevant and is still an important part of the energy mix to support the needs of humanity.

There are also several explanations as to why Rosatom was so successful in this period. First of all, our NPPs are of the III+ Generation and use the most modern technology. Even before last year’s incident in Japan, our NPPs met all the post-Fukushima requirements. This for example includes all the necessary active and passive secu-rity elements. Passive elements are those that work without any human activation and are able to work in critical conditions. In Japan, there was an earthquake and a tsunami and a power cut, but our stations would even be able to work under such critical conditions.

Another important factor is that we do not only build our NPPs abroad but also domestically; this is something our competitors do not do. You can-not go to another country and start building NPPs without showing its reliability on your own terri-tory. We understand that public acceptance for nuclear is essential.

FR: At an international level, Russia is often being perceived as a big supplier of natural resources –such as oil, gas and metals– to the world. Russia, however, is not yet really known as a country that exports high-tech competitive products to the inter-national markets. Can nuclear make this change in perception?KIRILL KOMAROV: This purpose underlies our efforts. The aforementioned numbers and rankings indi-

cate that we are extremely competitive. We work very hard on maintaining our leadership, vis-à-vis other competitors on the market. We definitely believe that nuclear energy can be the sector for Russia to not only export raw materials but also new modern technologies. This position is also being shared by the leadership of our country which reflects in the projects we implement –both domestically and abroad.

The diversification of the energy mix is not only applicable to Russia but to every country world-wide. The dependency on oil and gas is being dis-cussed and readdressed, to take into account future depletion rates. How do you see the long-term role of nuclear energy at a global level?

In Russia, we want to achieve a 30 percent share of nuclear energy within the energy mix. This tar-get can be reached, especially taking into account that we already have regions in the European part of Russia where we reach levels of 30 to 40 percent. As for the global energy mix, I believe that a target share of 20 percent is feasible. In my view, we also have the biggest reserves for the supply of nuclear energy.

It is a fact that oil and gas are becoming increas-ingly expensive as the oil- and gas fields become increasingly difficult to reach, resulting in more complex extraction processes. As for nuclear energy, we have sufficient supplies to support our planet for centuries. We truly believe that nuclear –as a source of energy– hosts the best conditions with regards to global warming, pollution, and so forth. As a source, nuclear energy remains extremely necessary to humanity; not for 100 per-cent but as an important part of the energy mix.

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Sergey Novikov, HEAD - FEDERAL TARIFF SERVICE

Interview with: Sergey Novikov, Head - Federal Tariff Service

INTERVIEW WITH:

Sergey Novikov, Head - Federal Tariff Service

Focus Reports: At the beginning of 2011, then Pres-ident of the Russian Federation Mr. Medvedev told the BBC that if the rising trend of electricity prices were to continue in Russia, the country’s electricity could become more expensive than in Europe or the USA, as early as 2014. How are you looking at this statement today? Would you agree?SERGEY NOVIKOV: Tariff increases are never a pop-ular matter to discuss and few stakeholders –particularly consumers– support upward price movements. Therefore, it is a standard practice for us to cooperate significantly with regulatory authorities in the USA and Europe to collaborate and compare both price indicators on the market as well as the rules of functioning. In this way, we also take part in –and organize– conferences and seminars to compare regulatory tools and their different ways of implementation. We examine how these tools influence the price indi-cators on both the retail and wholesale markets.

In the period 2010-2011, we thought that the regional regulatory authorities –i.e. those func-tioning on the territories of constitutional enti-ties of the Russian Federation, which are part of the regional administrations and formally inde-pendent from the Federal Tariff Service– would be much more careful in adopting investment programs at that time. Rather than their mis-take, the discrepancy in expectations was the result of the legislation that was in force back then.

As a result, we experienced a significant increase in tariffs of electricity transmission, which particularly affected the small and medium enterprises. They saw their prices increasing abruptly, by 30 to 50%, urging us to adjust the regulatory framework. One the one hand, we clarified the requirements with regards to investment programs and their returns. On the other hand, we also increased the public fac-tor in these decision-making processes.

FR: The Energy Strategy 2030 has set very ambi-

tious targets with regards to investment plans to modernize Russia’s electricity system in the next 2 decades. How healthy is the current balance between the revenues the different players can make on the market and the money that will be needed for these investments?SERGEY NOVIKOV: The most important aspect is to find a balance between the interests of the inves-tors and the consumers of electricity. The regula-tory framework in Europe, the USA and Russia has changed considerably. As a result, the struc-ture of the sector as well as the tasks of the reg-ulatory authorities has become increasingly com-plex.

Our tasks are linked to the different interests in the sector. They need to support a reliable functioning of the sector, its development, and take into account the interests of the consumers. These interests are often very different and sometimes even conflicting. Following the dif-ferent structural changes in the sector, the con-sumers have now become first time participants in the process, sometimes even as producers or investors themselves.

The new task of finding a balance between these different interests implies that we need to reevaluate our regulatory tools in the broader sense. We need to look at our financial resources –that can both come from the market and from the budget– to develop the sector and find this balance.

Not only because the financial crisis is not over yet, but rather as a general implication, today we also have the very important task of protecting investors. Apart from finding the right balance, we therefore also need to make the right decisions. Capital structures need to be bal-anced out so that financing can come from tar-iffs, the budget or from investments.

FR: 40% of the electricity sector still has gas as its main input, drawing a certain importance to the role and effects of gas price fluctuations. Going forward, how do you see the balance between Gaz-

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prom’s desire for higher gas prices and acceptable end user tariffs to support the economic growth of the country?SERGEY NOVIKOV: The decision to increase gas prices to allow for a certain level of profitability on domestic and foreign markets has been taken six years ago. The increase is being carried out very carefully to avoid spikes. Again, there is a need for a balance between modernization processes and structural changes. It is also important to study how this affects other sectors, as many of them use gas an input too.

The electricity sector has an immense poten-tial to increase internal efficiency in gas-to-power generation. The medium quantity of gas used to produce 1 Kwh currently lies around 330 grams in Russia, while special equipment now exists to decrease this number to 240 to 270 grams. Better energy efficiency is the main task in the energy sector today. Even though the gas price will increase in the future, better energy efficiency will limit or prevent increases in end-user tariffs.

Today, we pay close attention to the situation on the European and US gas markets.

FR: Experts indicate that a significant part of the tariffs is still going to the grid companies. To some extent, the discussion has been started at govern-ment level to study whether Russia’s state-owned grid companies FSK and MRSK can be privatized in the future. Do you see this as a possibility? Could it affect efficiency and electricity tariffs in the sector?SERGEY NOVIKOV: First of all, looking at the struc-ture of revenues that are being received from the consumers, this has not changed for ten years.

Generally speaking, the proportion received by generating companies in Russia amounts to roughly 55 percent today. Roughly 35 to 37 per-cent goes to the network companies, consisting of both the federal grid companies and distribu-tion companies. Of this percentage, the federal grid companies receive around 6 to 7 percent points. The figures only differ slightly with previ-ous years.

What is changing today, are the tariffs for con-sumer groups. To a certain degree, we observe an increase in prices for large consumers that use electricity off the high voltage lines, where the cost of transmission is much lower.

With regards to privatization, I share the same opinion as other regulatory authorities world-wide, which is to treat every company in the same way without taking into regards any differences concerning their ownership structures.

The most important aspect is to find a balance between the interests of the investors and the consumers of electricity. The regulatory framework in Europe, the USA and Russia has changed considerably. As a result, the structure of the sector as well as the tasks of the regulatory authorities has become increasingly complex.

Electricity tariff structure in Russia

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Yury V. SHAROV, MEMBER OF THE MANAGEMENT BOARD – HEAD OF UNIT INTER RAO UES – ENGINEERING UNIT

Interview with: Yury V. SHAROV, Member of the Management Board – Head of Unit INTER RAO UES – Engineering Unit

INTERVIEW WITH:

Yury V. SHAROV, Member of the Management Board – Head of Unit INTER RAO UES – Engineering Unit

Focus Reports: As a brief introduction, we have been following you for a few years now, but today we will mainly talk about INTER RAO Engineering as a new player within the sector. First of all, what are the advantages for INTER RAO Group and INTER RAO Engineering to have this vertically integrated business model?YURY V. SHAROV: Yes indeed, INTER RAO started to diversify its business focusing on building a verti-cally integrated model. We understand the entire value chain of vertically integrated models – from power generation to sales. By the Russian law, we are prohibited to create full-fledged vertical inte-gration, however in power generation, vertical integration is allowed. That is, you cannot link the grids and power generation. We understand how vertical integration in power generation works. In our case, we pursue a strategy that engages all the added value drivers - but in power generation only. Power generation includes construction, opera-tion, and sales of electricity. In this area, we are vertically integrated.

I see vertical integration as something very useful, and it’s legal. We’ll manage to control all the functional aspects of power generation because the quality and equipment, choice of a technological solution and optimized cost of this or that facility ultimately define its operation. Ver-tical integration is our key to increase the value and efficiency of our facilities.

FR: Do you so far have examples of projects where introducing this new stage of the business model helped increase the efficiency?YURY V. SHAROV: Yes, this is true for a few of our projects that we got through our acquisitions. They got off the ground – with selected technical solutions and contractors – before we took them over. Our project portfolio includes projects where

we were responsible for everything: choice of con-tractors, technological solutions, and the equip-ment. We can so far give an accurate estimation for every project, at least in terms of deadlines, and we get a quicker payback from the new power plants because we control the deadlines in our construction projects. We select technologies that fit us and our technical policy in the best way. This brings added value in terms of servicing and our operational expertise.

Thirdly, we work with efficient contractors, we can influence their work, our relations are con-tractual, and we make them deliver good quality that we monitor when it comes to choosing the contractor and not when the work starts. This effectively means that we get a better and more economical facility in less time.

To give an example, we have facilities that we were in charge of from scratch – like Urengoyskaya TPP. Or the new gas turbine generation unit at Tomskaya TPP-1. These TPPs almost met the dead-line in terms of construction that was fully mon-itored. That is why I believe that in these cases we got better solutions than the pre-selected solu-tions for projects that we took over. Take Gusi-noozerskaya power plant: the deadlines are over, the budget is in the red, no good contractors, and at the end of the day, it translates in material and technical issues.

FR: Is it still profitable to pursue projects that are not yours? YURY V. SHAROV: We have no other option because we acquired these facilities and we’re supposed to finish them up. It would cost more to change the technology and the contractors. Even if a solution is not ideal, we must complete the project.

FR: If we look at the growth strategy of INTER RAO

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Yury V. SHAROV, MEMBER OF THE MANAGEMENT BOARD – HEAD OF UNIT INTER RAO UES – ENGINEERING UNIT

Engineering, a fast way to expand is to acquire engineering assets. What challenges do you see in this strategy?YURY V. SHAROV: I don’t really agree with the idea of “acquiring assets”, I would call it “acquiring a com-petence”. Today, the engineering assets in Russia are represented, in our vision, by very few success-ful and efficient companies. We have looked at a lot of ways of buying a company that does design or manufactures equipment: in essence, we found nothing interesting there. Our strategy is to increase our competence because we have a lot of contracts and a lot of projects that we do indepen-dently. This is why we can get people on the market and manage the project correctly acquiring new competence in return. Of course, there are things that you buy: for instance, we now need to look more deeply in setup and commissioning. Or in case of a designed capacity with database and spe-cific technologies. Buying engineering assets in Russia does not yield the expected return, this money is virtually lost. I believe that it is most efficient to grow your competence: we get more from larger and more diverse contracts.

FR: If we look into your cooperation with G.E. and United Engine Corporation (UEC), what is the added value of entering the turbine manufacturing landscape, compared to sourcing equipment from abroad which is traditional for this industry?YURY V. SHAROV: This is an attempt of technology transfer - hopefully, a successful one. In gas tur-bines, we don’t have good homegrown equipment, and that is why we chose to make a joint venture and get gas turbine engineering technologies. We do it together with Russian Technologies and UEC, its division. UEC will be in charge of the local man-ufacturing content. We’re constructing a produc-tion facility near Rybinsk. Here, we get a quality product that is as localized as possible. We’re responsible for sales, for marketing of the joint venture, and I’m convinced that it will make a dif-ference in terms of the technological development of our engineering solutions. We can deliver effi-cient solutions for the TPPs on this basis, and we’re working on their design, construction, assembly and future operation. It’s a single approach and ready-made solutions. Such solutions save up to 40% of costs, so I believe that this project is prof-itable from the technological and commercial viewpoint.

FR: If we look at Russia’s energy mix, coal and gas are obviously still the main sources for power gen-eration. Are EPC projects in both areas equally attractive for you?YURY V. SHAROV: Here, the client has the say. If the client is interested, so are we. Of course, EPC in gas and EPC in coal are two different things.

EPC in gas is an easy project, with a clear price and clear solutions, a lot of them have been recently developed. We use cutting edge technologies of the international manufacturers depending on the solutions that they offer. We have Siemens and G.E. gas turbines; we also use Alstom’s gas tur-bines. We have good experience, good equipment, and we know how to make it all work. Coal-pow-ered generation accounts for a smaller share in our operations because we have more construction projects for power plants that run on gas. Coal generation means more complex construction projects that require more innovative solutions, additional adjustments in terms of steam, tem-perature and pressure parameters. We’re approach-ing it but we’re not yet there. In any case, we are ready to deliver what the client wants in both coal and gas. Coal generation implies more challenges, more works, but it’s also more exciting in terms of engineering. On the other hand, gas generation is easier as a project, and we’re clear about what the solutions are and what to do with them.

FR: We understand that INTER RAO as a group wants to reach the target of 40GW of generation capacity by 2015. What will the role of INTER RAO Engineering be to meet this target and what are your priorities this year to make it happen?YURY V. SHAROV: We’re supposed to construct a total of about 5.3 GW of capacity by 2017. Our power delivery contracts envisage about 5.5 GW. This will be the specific contribution of INTER RAO Engi-neering. There will also be modernization projects and construction of added capacity to the existing projects. Quite possibly, we will have a new con-struction project. INTER RAO as a group has a strategy of capacity expansion planning but this depends on factors like the market, the pricing and the stimulation measures adopted by the state. So, we have concluded that we will deliver 5.5 GW by all means, probably more. If we add our foreign projects, this brings this figure to 6.5 GW.

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Denis Fedorov, GENERAL DIRECTOR - GAZPROM ENERGOHOLDING

Interview with: Denis Fedorov, General Director - Gazprom energoholding

INTERVIEW WITH:

Denis Fedorov, General Director - Gazprom energoholding

Focus Reports: If we start with an introduction, Gazprom is of course a famous company, but if we look at Gazprom EnergoHolding and the interest it has in the power business, we understand there is an aspect of vertical integration. First of all, can you explain some of the benefits of this inte-gration when we look at the power sector?DENIS FEDOROV: All major international companies have an energy business department. The list of advantages is quite long, first of all for Gazprom we are a reliable consumer of natural gas. We carry out targeted works in the combustion of different kinds of fuel, depending on the situa-tion on foreign markets. At our facilities we can burn both gas and coal (about 8%). We came close to the parameters that can be observed in the most modern plants in Germany. In January 2012, we had a cold winter and in 2 weeks the energy business of Gazprom released a volume of gas that could have satisfied the demand of France, or one third of Germany’s demand. Another example: at the Novocherkassk power plant we can burn coal and gas depending on the situation on gas markets; we are ready to work in any direction most favorable to our parent company. In the very same way we use fuel oil residue (masut). If the share of fuel oil residue used at our facilities under RAO was no more than 5%, then today we buy from GazpromNeft or their official representatives almost 80% of fuel oil residue, covering in full the production of fuel oil residue by the Gazprom subsidiary. Everything is carried out on the basis of tenders, no one “forces us” to be suppliers. For us of course there are clear advantages, Gazprom has a very high credit rating, we are part of the Gazprom group, therefore any borrowings on foreign mar-kets for us is significantly cheaper then for other companies working in this sector.

FR: If you look at investment then, we understand that the DPM model is coming to an end and yet there is a new phase starting of modernization of aging facilities. Finding the right mechanism for

the return on investment is a hot topic today, that you have also been discussing with the Ministry of Energy. According to you what is the system that would work?DENIS FEDOROV: In this respect we do not agree with the Ministry of Energy. This is not only my personal position, or the position of Gazprom EnergoHolding. It is also the position of many Russian and international companies working in Russia. We believe that the new model implies a sharp increase in tariffs. For the consumers, this is a sharp increases in electricity prices with-out any guarantees on wether these resources will actually go towards modernizing existing capacity. Therefore there is an increase in end prices while decreasing investment activity in the sector, and this is unacceptable. Secondly, this model implies the complete refusal of gov-ernment participation in the development strat-egy of the energy sector, for example in the choice of sites to build new power plants, the refusal to analyze and manage the energy equip-ment used in the construction of power plants, substations and grids. This is also absolutely unacceptable. From the U.S. to the E.U. every government takes part to a certain degree in the decisions concerning the technologies to produce power, the sites, etc. Electricity is a special kind of product, and cannot be compared to other commodities. Looking at our equipment in power plants I can say that today 35% of our equipment has been in use for more than 50 years. If we do not start to invest in modernization now, by 2020 almost 50% of our equipment will have an operating life of more than 50 years.

The new model proposed by the Minister of Energy does not offer any answers on how and at the expense of what will investment be made towards these capacities. This, in turn, could lead by 2020 to a deficit of capacity or its inefficiency. For example, when RAO UES introduced the new liberalization model, it did so over a 5 year period, and by installments, 5% at first, then 10% and so on and so forth. And now we are

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asked to introduce a model in 1-2 years, without it being clearly written in any document. This is impossible because such model does not have a clear legal framework, including taxation wise. For example, this model implies the sale of elec-tricity at different prices, without explaining how each will be subject to taxes. For the tax inspec-tion, on the balancing power market there will be a different price altogether, which could be higher or lower than by contract. How all this will be included in the tax code is still an open ques-tion. This way this involves not only the imple-mentation of a new model in 1-2 years, but also in a legal vacuum, and it could take 3-4 to clearly define its legislation. Moreover, one cannot forget the Monopoly Service, which could inquire on why there are sales at different prices, and on the market a different price altogether. In this model there are more questions than answers. Actually it is better to call it a “concept” rather than a model. When the deputy minister says he has a model he is working on with the generators, I have my doubts. However I can say there is another model, an economic one, developed by the working group created by the Minister of Energy last march.

FR: The uncertainty around the current model — is this one of the reasons that makes you look out-side of Russia, we know Gazprom is looking at buy-ing power assets in Europe as well. Is this also one of the reasons and can you elaborate on the strat-egy you have in place to penetrate the European market?DENIS FEDOROV: Today Gazprom monitors closely the situation on Western European markets and our analysis shows that today heat generation in Europe is not very profitable. The governments of Western European countries support non-tra-ditional energy sources, however they are very expensive and quite inefficient. The results are clearly visible in tariff increases for end consum-ers. If the heat power sector was given equal con-ditions to compete with this energy segment, there would not be anything left. But if Western European governments are willing to sell electric-ity to their consumers at those prices, then go ahead. Even though at the last KPMG conference in Wien, many bankers have stated that they will not finance the non-traditional power sector. I think that, taking into account that in the 10

years it has been developing there have been no breakthroughs, and it remained just as expensive as before, even in terms of operation expenses, then there is no reason to expect any break-throughs in this field in the next 5-10 years. Therefore I think that Europe should start to backtrack and turn once again to traditional energy sources like coal and gas.

For now we are looking around, we have sev-eral interesting projects, we are looking into tak-ing part in the construction of new capacities. However so far nothing has caught our eye so to speak, in terms of acquisitions.

FR: If we look at the Russian market, you have been looking at acquisitions, we read and followed the story on IES holding and at the same time you announced that it is possible in the future to go for an IPO. If we look at your growth strategy, as the head of the company, how are you aming at increasing the value of the company in the coming years?DENIS FEDOROV: We have concluded our negotia-tions with IES holding and there will be no deal so we are going our different ways. As for possible acquisitions, we are in talks with Moscow United Energy Company and Quadra TGK-4. As far as an IPO is concerned, we are looking at 2016/2017 so it remains in our plans and we think that at that point we will have fulfilled our lion share of DPM projects, do it will be a good time for us to do the IPO.

FR: What will be the next step? How do you see the company growing? If we meet again in 10 years what will the company look like? DENIS FEDOROV: It is a difficult question, it is hard to foresee what will happen on European mar-kets, on Eastern Asian markets, which are more attractive for us than European ones. I believe that acquiring or building and operating several energy facilities outside of the Russian Federa-tion and CIS countries is quite interesting for us, especially in Europe and North-East Asia, but only if it will be profitable for us. Furthermore, we continue to analyze the situation on the domestic market and do not exclude other pos-sible acquisitions.

For the whole interview please visit www.energy.focusreports.net

www.energy.focusreports.net


Company index

AKME-Engineering ....................11, 23

Alstom ........................................22, 41

Association of Power Consumers . 14

Balcke - Duerr .................................. 22

Council of Power Producers ........... 16

Danfoss. ............................................. 8

E.ON Group ..............................4, 6, 20

Enel .................................................... 4

Federal Grid Company ...........8, 15, 19

Federal Tariff Service ..............6, 29, 38

Forenergo .........................................18

Fortum ............................................... 4

Gazprom Energoholding .............6, 42

IDGC Holding .................................... 9

Inter RAO Engineering ..............12, 40

Interautomatika AG ........................ 20

Interregional Distribution Grid Company ......................................... 15

Intertechelectro ................................. 7

Komplektenergo ........................11, 22

Np Hydropower .............................. 26

Orgres ........................................... 7, 24

Rakurs .........................................11, 27

Rosatom .....................................10, 36

Rosenergoatom .............................. 22

Rushydro .............................. 11, 25, 34

Siemens .......................... 11, 20, 22, 41

Skolkovo Business School Energy

Centre .............................................. 28

Soyuz Holding ................................... 9

State Duma Energy Committee ...... 7

Taprogge .....................................11, 22

Turboatom ..................................11, 22

Unified Energy System of Russia .... 4

Us-Russia Business Council ........... 30

Vitkovice .....................................11, 22

ZETO .................................................. 9

Ziomar ............................................. 32

Zio-Podolsk ................................13, 32

E.ON

45

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