Publication: Eurasia Daily Monitor Volume: 4 Issue: 132

On July 5 Russia’s Unified Energy Systems (UES) launched the fifth power-generating unit of its flagship project in the Far East, the Bureiskaya plant, in Talakan, Amur region. The plant’s first unit was launched in June 2003 and is due to be completed in 2008 (Interfax, RIA-Novosti, July 5).

Last month, UES pledged to accelerate this project. On June 27, UES head Anatoly Chubais announced that the company intends to bring the Bureiskaya hydropower plant to its maximum capacity of 2,010 MW one year ahead of schedule, in 2008 (RIA-Novosti, June 27).

UES is the largest power company in Russia, generating 636 billion kilowatt hours (kWh) or some 70% of the country’s total electricity output. It also owns 96% of the high-voltage grids, 77% of the distribution network in Russia, and it employs some 578,000 people. UES is a holding company that owns controlling stakes in 73 regional energy companies and 44 power plants. Since 2002 UES has been pursuing reforms designed to separate its competitive (generation and supply) and non-competitive (transmission and distribution) businesses.

As a part of the reform package, Inter UES, the Russian monopoly electricity importer and exporter, is moving toward a public offering of its shares. Inter UES could hold an IPO in 2008, Chubais said on June 27. However, after the IPO, the government’s stake in Inter UES would remain at no less than 50% plus one share, Chubais pointed out (RIA-Novosti, June 27).

In 2006 Inter UES reported 1.7 billion rubles (over $65 million) in net profit, or 76% percent up year-on-year, while its revenues reached 28.7 billion rubles ($1.1 billion), a gain of 32%. Last year, the company exported 20.5 billion kWh and imported 5.1 billion kWh of electricity (RIA-Novosti, June 8).

However, Russian electricity exports encountered problems last month, as Inter UES strongly disagreed with its largest client, Finland, which accounts for more than half of all its exports. From June 1, 2007, the Finnish company Fingrid raised the transport fee for Russian electricity by 25%. Inter UES claimed that the new tariff was intended to block Russian electricity exports and it “damaged” bilateral energy ties.

Earlier this year, Russia’s plan to boost electricity exports was dealt a major blow. Since February 1, 2007, China has refused to import Russian electricity, thus leaving the Bureiskaya and Zeiskaya plants without a market to sell electricity. Chinese negotiators reportedly argued that the Russian price, $0.08/kWh was unreasonable and nearly twice as high as China’s domestic prices.

Moscow and Beijing have long discussed the electricity trade. In the mid-1990s, Russia and China considered a project to build a 2,600-kilometer power transmission line from Irkutsk region in Siberia to China at a cost of $1.5 billion. However, the two sides never agreed on pricing, and China abandoned the project in 1999.

However, Russia has remained keen to export electricity to China. UES supplied about 800 million kWh of electricity to China last year and plans to supply 1.4 billion kWh in 2007, up from 300 million kWh in 2004.

In March 2006 UES and the Chinese State Grid Corporation pledged to finalize a long-term deal on energy supplies. In November 2006, the companies clinched a deal to raise annual exports of electricity from Russia to China up to 3.6-4.3 billion kWh/year in 2008-2010, 18 billion kWh in 2010-2015, 38 billion kWh in 2010-2015, and up to 60 billion kWh eventually.

Earlier this year, UES planned to seek some 20 billion rubles ($780 million) in loans to finish construction of the Bureiskaya power plant. These loans were to be secured by long-term export contracts to China. Now UES is understood to be hard pressed to seek funding elsewhere, as its contract with China appears slow to materialize.

Without customers for its electricity in Northeastern China, the Bureiskaya power plant, as well as the other ambitious energy projects in the region, may end up as liabilities rather than assets. The Bureiskaya and Zeiskaya plants already produce more electricity than the region can consume, at least for now.

Last month UES indicated plans to build a power line from Siberia to Europe. The project aims at selling Siberian electricity to central parts of Russia and Europe, the regions facing electricity shortage, Chubais said on June 27 at a meeting of the International Commission on Large Dams (Itar-Tass, June 27). Although UES did not disclose any details, the announcement indicated Russia’s frustration with China and recognition of the difficulties UES faces in its pursuit of China-bound export plans.