Evgeniy Fyodorov: “The next step should be fast-track privatization”

Oleg Deripaska’s OAO EuroSibEnergo, almost half of which is working for the Siberian plants of Rusal, is considering supplying aluminum companies in the European part of Russia and in the Urals with energy. For this purpose EuroSibEnergo is ready to construct as well as to buy.

Moreover, the company is interested not only in generation, but also in electricity and heat grids. Funds for these large-scale plans exist, what is more important for the state is to determine the next steps for the development of the industry, said CEO of EuroSibEnergo, Evgeniy Fyodorov in his interview to Interfax.

- Last week, a meeting of government commission with the participation of Prime Minister Vladimir Putin took place. It resulted in many high-sounding statements about the checks and corruption in the energy sector, and proposals of completing the reforms in industry were not noticed. What was the most crucial for you in the prime minister’s statements?

- In my opinion, the next step of the reform should be the fast-track privatization in the industry. We hope that it will be set in motion, that the logic of the previous statements will continue.
This correlates very well with Prime Minister’s words, including the criticism (of the managers of energy companies, mostly state-owned ones, for the use of "gray" schemes for personal use – Interfax).

Now there is no explicit concept (on privatization – Interfax) to be seen, although the theme of privatization of at least several IDGC in the next year was initially proclaimed. Given the facts that were presented at the meeting, I think it is a hot topic. The following year, it is appropriate to run several privatization processes in IDGC. Maybe at the first stage it will be transmitted to the management, but when the investor is willing to invest money for privatization – it is a more correct approach. And from the Prime Minister’s words, I concluded that this should be the next step after the measures which he had mentioned.

- Are you ready to take part in the process of privatization?

- We confirm our interest in at least IDGC Siberia in the light of the experience Irkutsk Electric Grid Company has, and it is certainly positive: in the Irkutsk region its transmission tariff is the lowest, it differs several times from the tariffs in the neighboring regions with similar structure of productive supply. The same is with Tyumenenergo, it was mentioned at the meeting - a company similar to Irkutsk Electric Grid Company, which has essentially higher tariffs.

We sent relevant offers (to purchase IDGC Siberia – Interfax) to the Department of Energy. When earlier the topic was the privatization or short-term management of Buryatenergo, then after the meeting held at Deputy Prime Minister’s (Igor Sechin – Interfax), we prepared a kind of long-term strategy, including the change to a single boiler tariff in the future in the Zabaikalye Territory, the Republic of Buryatia and the Irkutsk region. In our opinion, in the medium term, we can implement it without raising the tariff for the transmission in the Irkutsk region. EuroSibEnergo is able to attract the funds for the purchase of IDGC Siberia and for investing in it – partially equity funds, partially borrowed funds.

- Are there assets in the generation that could be of interest for you?

- We are now actively considering a number of possible deals on heating grids. It is also quite a promising market in terms of under-investment in recent decades, in terms of the possibility of getting significant economic effects with the change of the management system, and investing in order to reduce losses. The present condition of the heating grids in the country is, according to our estimates, much worse than the condition of electrical grids. If we talk about the heating grids, then first of all we mention Siberia. If we talk about heat and electricity generation, then we are interested in the first price zone.

- What kind of assets could it be? For example, can it be those assets that are offered for sale under the transaction between Gazprom and IES (if, of course, the transaction is made)?

- We have a certain interest in some plants of the assets. But we do not consider WGC and TGC as a whole, but only certain plants, which are now in the IES companies.

- On what basis do you select the plants you are interested in? Is it connected, for example, with the needs of Rusal, with which you have a common shareholder?

- Of course it is. It is possible to get a certain synergy given that the companies are in the same group. First of all, we consider the sites with the factories of Rusal.

- In the case of the Bogoslovskaya TPP, which Prime Minister Vladimir Putin suggested Rusal to buy from Renova, should the buyer be an aluminum company, or it can be your company?
- It’s too early to speak about it. For the time being we are in talks with Rusal for the joint implementation of this project. This refers to the joint purchase, and possibly to the construction of replacement capacities.

- As regards the construction of Novobogoslovskaya TPP – it is an object of CDA. EuroSibEnergo more than once expressed its interest in obtaining CDA rights for implementing its own projects. Will you have the opportunity, if it is necessary, to re-execute the contract for another project?

- We are planning nothing of the kind (transfer of rights to another CDA object – Interfax). Some serious investments have already been done. We believe that it is appropriate to finish this project.

- EuroSibEnergo constantly criticizes the existing facilities of CDA. You are currently discussing with regulators the possibility of revising the existing rules of pricing in the market of power, not only in terms of CDA, but also for forced generation, fees for hydropower and so on?

- We are saying that we are displeased by the high price of the CDA projects, as well as by the forced generation. Here the picture is not quite clear: similar plants, located within a radius of thousands of kilometers have similar equipment configuration and volume of energy generated, but have very different tariffs. I’m not going to name specific plants not to offend my colleagues. But it’s easy enough to check it: in actual fact the plants are “twins”, but have power tariffs which differ significantly. And this applies not only to the first price zone, a similar situation is also in the second price zone.

In my opinion, there is some discrimination of some of the generators and vice versa, too mild attitude to others when setting tariffs for electricity and power.
As for CDA, it is already late. And here the problems are the same: site selection, defining equipment configuration – it’s all not too clear. I hope that in the new document, which will be prepared by the Ministry of Energy, there will be more appropriate market conditions.

- What document are you speaking about?

- There is a general understanding that the peak of CDA will pass quite quickly, in fact, in 2014-2015. And the industry must keep modernizing, so I hope that the Ministry of Energy will start a new instrument in order to stimulate investments. The existing model of the market outside PSA framework makes any investment ineffective. We will, of course, be interested in the mechanism to guarantee investments (MGI). We are ready to apply for competitions and participate in them. It is for the Ministry of Energy to determine when it happens. Certain law making work is done, we made suggestions on methodology of sites identification, and on the methodology of competitive procedures. I hope that in 2012 a regulation will be issued (on the mechanism to guarantee investments - Interfax) with a focus on the year 2013 as the year of competitions start.

- You have ongoing major projects, for example, a plant in Ust-Kut. How do you intend to implement it, given that there is no contract for the provision of power?

- We understand that in the short term within the framework of CDA this project cannot be implemented, at least, until there’s Ministry of Energy’s decision to expand the list of CDA sites. But there is a possibility of implementing the projects without CDA, the only option is the following - if a large industrial facility is being constructed and generation is built for its needs. Clearly, this may not be very profitable scheme for a new customer, but often it is the only opportunity to implement the project. For example, Lenskaya plant is the best alternative for providing power for Udokan deposit, and the workload there is quite serious - somewhere around 400 MW.

- You were planning to build this object in a partnership with the Chinese company Yangtze Power. How is the preparation of joint projects proceeding?

- Speaking about Lenskaya plant, we expect to complete the feasibility study in the 1st quarter. The cost of the project will be determined depending on the choice of technology: if it’s a classic steam-gas cycle, 1 kW will cost about 1000-1200 dollars. And concerning HPPs, we are in the process of creating primary documentation. Here the process is more complex - first we’ll need to prepare the declaration for the construction of hydraulic structures. We are only at this stage for now.

- As far as we know, the plants will be export-oriented as well. Are you thinking of entering foreign markets not only through the supply of electricity, but also by obtaining power facilities?

- We participate in the competition for the construction of the Ulan Bator TPP-5 in Mongolia - coaling plant with the capacity up to 500 MW. This is the most recent project we are working on quite actively. Currently we have applied for prequalification, we expect that it will be over by the end of this year. In general, we consider Mongolia to be a very promising market. According to our estimates, already now the latent demand for electricity there reaches 230 MW. So we have no doubt that the new plant will be in demand. Moreover, even for Mongolia the scale of the project is rather small: after 2017 deficiency will appear again and maybe we will need to think about the construction of another block. In point of fact, this project signifies the return to the historic market. Irkutskenergo was once the curator of the Mongol power system. And technically the Mongolian power system almost entirely consists of Russian equipment. We are quite well known there. And, nevertheless, the competition is serious. Among the competitors in this market there are mostly Chinese and Korean companies.

- Going back to the Russian market – there were new pricing rules in 2011. Did they have a major influence on you? Or was EuroSibEnergo hedged by bilateral agreements?

- Speaking of shortfall in income as a result of these controversial decisions – it was about 7 billion rubles. The most important role here was played by the measures aimed at regulating hydroelectric power and by the new approaches to creating value of forced generation. Of course, this was a game with only one goal, far from the market. In terms of hedge, which contracts provided for, unfortunately the law was changed in such way that the power supply under these contracts became unprofitable for both sides - for the supplier and the consumer. So we had to adjust contracts, and now have practically stopped supplying Rusal with power.

- In 2012, the bar of the growth in electricity prices became even lower - in the range of inflation (6.5-7.5% instead of 15% in 2011). What are your expectations of the EuroSibEnergo economy in the next year?

- Unfortunately, we do not see any major changes in terms of market rules. On this basis we will see the figures this year: performance indicators as well as investments (around 15 billion rubles) are likely to remain at the level of 2011. In the first half of the year neither our tariff nor day-ahead market price will change, and if the changes do take place, they will be insignificant. Given the fact that we will run Boguchanskaya HPP, we expect that the price of electricity in the second price zone will be at the level of 2011. Even before launching the plant in the summer, the reservoir will be filled with water in the spring, it will require increased releases at the plants upstream - in Irkutsk, Bratsk, Ust-Ilim HPPs. As a result, the share of hydropower in the total balance will rise. The production will grow, but the growth in the share of hydropower will put pressure on prices. In addition, in the second half of the year we expect indexation, at least in some part of supply by RC (regulated contracts – Interfax).

- The market was expecting that, perhaps, by the end of 2011 you will have a new shareholder - JSC RusHydro at the expense of exchange deal of the shares in the Krasnoyarsk HPP and Irkutskenergo with the share in Eurosibenergo. However, the transfer of 40% of Irkutskenergo to RusHydro is delayed. According to your expectations, when will the second stage - the exchange of assets of RusHydro for the block of shares of EuroSibEnergo - take place?

- I hope it will be in the first half of the year.

Press Agency Finmarket
December 27, 2011

December 27, 2011
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