Mission&Strategy

RUSHYDRO STRATEGY HIGHLIGHTS (PDF)

The strategy of RUSHYDRO up to 2020 (2030). KEY STATEMENTS AND CONCLUSIONS

This document describes the main areas of the Company’s strategy and constitutes an upgraded and adjusted first version of the Company’s strategy for the period up to 2010 and for the longer term, up to 2020, that was approved by the Board of Directors of the Company in the autumn of 2005.

Our strategy is based on our confidence that the further advance of the hydro-power industry and wider use of renewable energy sources will help strengthen Russia’s position as a global energy power, promote the country’s growth and enable it to meet the challenges of the future.

Speaking of the Company’s core business, the following key unique specifics should be highlighted:

·                     Generator of clean electric power: renewable natural resources and environmental purity of the sources used to produce electric power;

·                     Systemic reliability framework: HPPs function as a supergrid and an operational (having highly manoeuvrable capacities) and strategic reserve for generating electric power and ensuring reliable operation of the Unified Energy System (HPPs with long-period storage reservoirs);

·                     Tool for developing regions: construction projects for major HPPs and cascades of HPPs used as infrastructure hubs creating the framework for regional development;

·                     Innovation initiator in the renewable energy sphere: priority focus on technical retooling, encouraging scientific research and development and practical application of new generating technologies using renewable energy sources.

The Company sees its mission in enabling better use of hydro resources, higher UES reliability and wider utilization of the renewables for the benefit of both its shareholders and the public at large. We are striving towards long-term harmonious growth of RusHydro so as to make it a leading global renewable energy company.

The Company’s key values are:

·         Clean energy;

·         Prosperous country;

·         Leading company;

·         Close-knit team.

Sustainable global development will depend on the world community’s response to the three key challenges (the Three Es):

·        Economic growth, including problems of development unevenness, imbalance and quality;

·        Energy security, including problems of available energy sources diversification and resource markets stability strengthening;

·        Environment, including problems of global warming and fresh water shortages.

Analysis of global trends, the current situation and available resources has brought the Company’s management to the conclusion that the following key challenges determine the possibility of Russia becoming a global economic power:

·         Infrastructure development;

·         Economic diversification;

·         Sociodemographic development.

What is needed for meeting these challenges is a well-balanced public policy capable of laying the institutional and infrastructural frameworks for future development.

In the context of global trends, the current situation in Russia provides ample opportunities for launching diverse infrastructure and innovation projects in the electricity sector.

This conclusion is supported by the fact that the rising growth-driven demand for electricity calls for an urgent upgrading and buildup of the already inadequate fleet of obsolete and worn-out electric equipment. Hence, an enabling environment is being created right now for a radical breakthrough, with the priority rates of hydropower and renewable energy development potentially constituting the key success factor.

In the long term, renewable energy (including hydropower) will be an environmentally effective and economically efficient way for achieving energy security, so the existence of unharnessed hydro and renewable potential should be regarded as a strategic reserve for growth of both the global economy and individual economies.

Use of renewable energy potential (above all, hydropower development) might be one of the keys to creating the right environment for development, building up competitive advantages and developing the various regions of the Russian Federation.

In pursuit of its mission in the 21st century, the Company will play a vital role in responding to these global and country challenges. Implementation of the Company’s vision will provide for long-term growth of its value and ultimately contribute to growth of both the Russian and the global economy.

The Company’s strategic objectives bring into focus what is needed for realizing its mission and for specifying its vision of the future. The Company’s management is set the following goals:

·              Increasing the Company’s value;

·              Providing for system reliability and safety;

·              Enabling sustainable development of renewable electricity production.

The Company’s strategy is based on a long-term action plan (of strategic initiatives) for achieving the goals set. Its strategic actions are focused on key thematic areas that differ in terms of objects of management, approaches and implementation conditions (the portfolio approach).

1. Maximum efficiency and reliability of operating facilities

Operating facilities constitute the basis for the operation and development of the Company. Maximizing their efficient and reliable operation is a key strategic priority.

2. The driving force behind renewable energy development in Russia is implementation of projects to create new renewable capacities.

The Company is initiating and taking part mainly in cost-effective projects for creating new renewable capacities, thereby providing an enabling environment for enhancing their efficiency.

Projects that have no cost-effective potential but are vital from the standpoint of maintaining system-wide efficiency are implemented by obtaining (retaining) sources for implementing these projects according to plans that minimize any adverse impact on the Company’s value (the main parameter being the investment component).

The Company may participate in investment projects as both investor and developer, thereby providing for development of project implementation plans, facility design and construction arrangement, operation of the facilities built, and sale of the electricity they produce.

The Company is attracting private investors to participate in HPP construction projects so as to increase investment resources and acquire extra project competencies (the basic terms for the investor are 50%-1 share in medium-sized and big projects, 75%-1 share in small (up to 25 MW) projects).

The package of key activities planned by the management for setting up new energy facilities in the areas of the Company’s strategic interest in Russia includes, inter alia, the following (project portfolios):

2.1. Projects to build territorial-industrial development hubs (Siberia and the Far East)

Projects of this type are based of the principles of private-public partnership, with state participation in co-financing of the infrastructure component. This promotes enabling conditions for creating major new multisectoral territorial clusters with integral interconnected development of production units and the requisite transport, power and social infrastructure. The key arguments in favour of HPPs consist in stable prices for the electric power produced (hydrocarbons-free prices) and long term functioning. This creates powerful multiplication effects, including in the sphere of employment, with simultaneous development of urban settlements, technologies, transport corridors etc.

2.2. Programme for development of pumped-storage hydropower plants (European part of Russia)

The demand for system services within the Integrated Energy Systems of the Centre, North-West and South, calls for highly flexible capacities or power plants capable of switching promptly from a power generation mode to power consumption. Use of PSHPPs, which, in contrast to other types of flexible-mode electric power plants, have a dual regulating margin, makes it possible to absorb night-time capacity excesses within the power grids, thereby optimising the operating modes of the basic electric power plants.

The Company is working towards adoption of rules governing the capacity and system services markets that would provide for appropriate compensation for the contribution made by PSHPPs to ensuring system reliability and safety.

2.3. Projects for covering the power grid deficit (South of Russia)

The most acceptable method for supplying power to the territories of the Northern Caucasus that experience power shortages, covering the demand for flexible power capacity, as well as resolving a number of water supply problems, is to implement programmes for building small and medium-sized HPPs, which may also be considered as factors providing infrastructure for territorial development.

2.4. Wider use of new Renewable Energy Sources

The Company is implementing innovative programmes for increasing the use of new RES: tidal power, wind power, geothermal power and others, thereby giving an extra impetus to the economy’s transition to new industrial technologies. In the long term, the Company is considering the possibility of taking part in adopting advanced power technologies.

The fact that Russia’s potential of the given RES or the technologies for producing electric power on their basis have not yet been fully researched accounts for the stage-by-stage implementation of this group of projects: exploration and study of the RES potential, R&D, launch of pilot projects within the scope of which technologies are being developed for design, construction and operation of this type of plant, as well as technologies for their interaction with the power grid and power consumers, and implementation of full-scale projects if they prove their technical and economic feasibility.

The Company is also working towards adoption of legislative acts designed to ensure state support for use of RES and pays heed to economic mechanisms envisaged by effective international treaties to combat climate change, including the Joint Implementation mechanism of the Kyoto Protocol.

2.5. System-wide projects

System-wide projects go beyond the bounds of territorial amalgamations. They are designed to address the challenges involved in developing Russia’s energy system and to increase the overall reliability and safety of the UES and imply creating backbone electric power plants that will make it possible, in the future, to form the foundations for a Eurasian energy system, thereby resolving the problems of national and international energy security.

Some of the projects of the given group are super-large (mega-) projects, calling for special new financing models, using the funds of national and global development institutions, involving the funds of international investors, state support and, possibly, changes in the legal mechanisms for their implementation. The Company is striving to take the part of a full-cycle developer in such projects, designing projects implementation mechanisms and, in the future, providing for operation of those facilities.

3. International activities

While Russia is the Company’s priority area of presence, the Company believes its expansion on to foreign markets to be one of its development priorities. The main lines of business are export, implementation of investment projects and provision of hydropower asset management services, engineering services and hydro-electric power plant operation services.

4. Development of the business portfolio

The main lines are acquisition of assets at an economically feasible purchase price, development of the design and engineering business, development of sales (including retail business), development of its own construction business (construction organizer), interest in the capital of consumers (BEMO).

5. Corporate projects

Corporate projects are geared to increasing operating efficiency and the quality of corporate governance.

6. Programme of state support measures

Large-scale development of the hydro-power industry and use of RES in Russia requires, by virtue of the specific nature of this sub-industry, adoption of a programme of state support measures for creating favourable investment conditions.

The Company has identified three scenarios for attaining its strategic objectives. These scenarios differ in terms of business environment development options and conditions for implementing and ensuring the efficiency of investment projects on the territory of Russia (investment climate), which, in turn, will also be linked with the scenario of Russia’s future development. The scenarios determine the portfolios of the Company’s investment initiatives. The other strategic actions are included in all of the Company's scenarios. The Company’s opportunities for implementing foreign projects as investor and for acquiring assets will depend on the scale of investment within the country and, consequently, on the development scenarios.

The Company rejects compromise with respect to ensuring reliable operation of equipment and safety of hydraulic structures. As a result, each of the Company's development scenarios implies actions to maximise the efficiency and reliability of the Company’s assets.

The key characteristics of the different scenarios are presented below:

·                     The Conservative Scenario envisages implementation of priority projects for building power capacities on the territory of Russia (those already in progress or those for which the main implementation conditions have been determined). The total capacity to be commissioned on the territory of Russia between 2008 and 2020 under this scenario amounts to about 7.4 GW.

·                     The Balanced Scenario envisages, apart from priority projects, implementation of additional projects for creating infrastructure hubs on the basis of HPPs, as required for resolving infrastructural development problems, of projects for ensuring system reliability in the European part of Russia, as well as expansion of new RES use. The total volume of capacity to be commissioned on the territory of Russia between 2008 and 2020 under this scenario amounts to about 22.2 GW.

·                     The Diversified Scenario envisages maximum development of Russia’s hydro-potential, creation of system-wide mega-projects, including ones using new RES, as well as variants for increasing diversification. The total capacity to be commissioned on the territory of Russia between 2008 and 2020 under this scenario amounts to about 33.4 GW.

The Company has decided on the balanced development scenario as the basic one, being characterised by the following projected strategic targets:

Table 1. Strategic targets

¹ In the event of economically feasible conditions

 Irrespective of the development scenarios, the management is chanelling resources into the following projects and programmes to ensure maximum synergy and the greatest value for the Company:

1.                   Corporate reorganisation of the Company: transition to the target model of a unified operating company and Company equity offering on the stock markets.

2.                   Comprehensive long-term programmes for technical retooling and reconstruction.

3.                   A programme of measures to promote models of the electric power, capacity, system services and derivatives markets favouring the Company, taking account of the Company’s specifics and ensuring adequate compensation for the Company’s contribution to system reliability.

4.                   Creation of the Boguchany power and metallurgical association (BEMO).

5.                   Completion of the Bureiskaya HPP and construction of the Zagorskaya PSHPP-2.

6.                   Development of major new projects – stage 1 of the Southern Yakutia hydro-power complex (Kankunskaya HPP) and Evenkiiskaya HPP.

7.                   Promotion of institutional support measures for use of RES in Russia.

8.                   Attracting private sector funding for HPP construction projects, especially in the small HPP sector.

9.                   R&D, above all in the field of tidal power development.

10.               Construction programme for small HPPs, especially in the south of Russia.