RUSSIAN POWER. IN ANTICIPATION OF NEW PACESLONDON, 12.03-13.03.2012

INNOVATIONS IN THE RUSSIAN

ELECTRIC POWER INDUSTRY.

HOW TO ATTRACT INVESTMENTS?

Pavel Shatsky,

First deputy to General Director of Gazprom Energoholding

Priority development of electric power sector is an indispensable condition for a secure power and heat supply and inadmissibility of economic growth limits

2

Market model should foster sustainable development of this industry sector

INNOVATIONS IN THE RUSSIAN ELECTRIC POWER INDUSTRY. HOW TO ATTRACT INVESTMENTS?

Structure of an electric power cluster

Equipment and engineering

market

Assets of TGK and OGK

Fuel market

Infrastructure services market

Electric power sector regulation model

FINAL CONSUMERS

New technologies should become a driving force in modernizing electric power field assets

3

The field efficiency improvement is not possible without development of new technologies

Innovative projects of companies belonging to the Gazprom Energoholding group

COAL COMBUSTION TECHNOLOGIES

Novocherkassky Power Plant – first Russian construction project of coal power unit 330 MW using the circulating fluidized bed technology (CFB).

GAS-VAPOR TECHNOLOGIES

Kirishy Power Plant – a new schematic circuit developed with unique three-flow heat-recovery unit with intermediate superheating and natural circulation, as well as a project of technical upgrade of the existing vapor turbine К-300-240 LMZ for a К-245-13.3

GAS-TURBINE ADD-ONS

TEZ-9 (Moscow) – a pilot prototype of the first gas turbine unit GTE-65 manufactured by the JSC Power Machines.

INNOVATIONS IN THE RUSSIAN ELECTRIC POWER INDUSTRY. HOW TO ATTRACT INVESTMENTS?

Accomplishment of the General Scheme of supplying Power Stations with capital investments will require 10 trillion rubles up to 2030

4

30 GW of power delivery contract will not solve the technical upgrade problem of electric power field

Main electric power equipment in this sector has a high rate of obsolescence and physical deterioration

18

33

43

37

12

1

1991-2010

1981-1990

1971-1980

1961-1970

1951-1960

before 1950

Russia: introduction of structures by years, GW Russia: need for technical upgrades, GW

2010-2020

2020-2030

2030-2040

2040-2050

TOTAL

50

43

3314418

INNOVATIONS IN THE RUSSIAN ELECTRIC POWER INDUSTRY. HOW TO ATTRACT INVESTMENTS?

The actual distribution of incomings doesn’t cover the requirements of generating companies in their need for functioning and development

5

Market model of this field doesn’t reflect the priority of capacity upgrading

Generating companies receive only 25% of sale proceeds of final consumers

FUEL SUPPLYOPERATION OF POWER PLANTS

TRANSMISSION AND DISTRIBUTION

SALES

≈20-25%

INNOVATIONS IN THE RUSSIAN ELECTRIC POWER INDUSTRY. HOW TO ATTRACT INVESTMENTS?

Thermal generation (ТGК) finds itself in a worse situation than OGK because of the scenario conditions of the early period of reforms, whilst having higher needs for modernization

6

Efficiency of business models in generating company blunts

Tendencies of electric power field in 2009-2011 in view of OGK and TGK

Operating efficiency Converting the potential

Expenses for fuel / Income, %

2009 2011 2009 2011

44.36 ТGК 49.63 47.33 ОGК 55.40

Growth rate (Income / Average headcount) , %

2009 2011 2009 2011

18.83 ТGК 19.77 –1.48 ОGК 14.43

EBITDA profitability, %

2009 2011 2009 2011

14.93 ТGК 9.68 12.99 ОGК 12.87

Growth rate of market capitalization, %

2009 2011 2009 2011

–18.73 ТGК 7.08 –45.86 ОGК 4.28

INNOVATIONS IN THE RUSSIAN ELECTRIC POWER INDUSTRY. HOW TO ATTRACT INVESTMENTS?

The actual situation with necessary and guaranteed volumes of financing causes conservation of equipment obsolescence

7

Existing mechanisms don’t provide guarantees of a return on innovation investments

Existing investment encouraging tools 2008-2020

Upgrading capacities ≈ 35%

The guarantees on return of innovation investments (standard CAPEX for new construction) doesn’t cover risks of innovation projects

New construction ≈ 55%

Innovation projects ≈ 10%

30 G

W20

GW

NO TOOLS TO ENCOURAGE INVESTMENTS

Cost

of

cons

truct

ion

Implementing projects of Power Delivery Contracts

≈30%

Volume of financing covered by guarantees on return of innovation investments

INNOVATIONS IN THE RUSSIAN ELECTRIC POWER INDUSTRY. HOW TO ATTRACT INVESTMENTS?

GROUP 1 GROUP 2

When not expensive “long” money for new construction are lacking, one should look at the projects of deep modernization with more attention

8

It is necessary to add new tools to the economic model of the industry modernization

Possible investments stimulation tools 2012-2020

Standard CAPEX for new construction

Capital intensive projects ≈ 90%

from 50% to 70% of standard CAPEX

Noncapital intensive projects ≈ 10%from 30% to 50% of standard CAPEX20

GW

NO GUARANTEE OF INVESTMENTS RETURNCost

of

cons

truct

ion Limits of compensation of construction price at the cost of competitive power take-off –

118 thousand rubles/MW per month

The cost of competitive power take-off doesn’t cover more than 50% of expenses

INNOVATIONS IN THE RUSSIAN ELECTRIC POWER INDUSTRY. HOW TO ATTRACT INVESTMENTS?

THANK YOU FOR YOUR KIND ATTENTION

RUSSIAN POWER. IN ANTICIPATION OF NEW PACESLONDON, 12.03-13.03.2012