Power Industry Reform Background

In the 1980s electric power industry of the country started showing signs of stagnation: generation capacities were renewed slower than electric power consumption increased.


In the 1990s, when the economic crisis in Russia broke out, the volume of electric power consumption substantially reduced, and renewal of capacities practically stopped.


The whole situation in the power sector was characterized by the following data:


  • As far as technological indicators are concerned (i.e. fuel rate, average efficiency of equipment, operating power of stations etc.) Russian power companies were falling behind their analogues in developed countries.
  • There were no stimuli to increase efficiency, encourage energy saving, and plan power generation and consumption more rationally.
  • In separate regions regular power interruptions took place. The country faced a global energy crisis, and probability of major power failures increased.
  • There was no pay discipline, and non-payments were widespread.
  • Power sector enterprises didn't provide financial and information transparency.
  • Access to the market was closed for new independent market players.


All this led to the necessity to restructure electric power industry, creating stimuli to increase efficiency of power companies and providing opportunities for attracting more investments to the sector. Otherwise, under further expansion of external economic cooperation, Russian enterprises could lose economic competition not only in foreign markets, but also at home.


Power Sector Structure in 2000




Goals and Objectives of the Reform


In recent years Electric Power Industry of Russia has undergone radical changes: change in State regulation system of the industry, competitive electric power market formation, creation of new companies.


Reorganization is aimed at increasing efficiency of power plants operating, creating conditions for Electric Power Industry development on the basis of stimulation of investment activity and finally providing consumers with sustainable and regular power supply.


During the restructuring period sector structure changes as well: separation of natural monopoly functions (power transmission, dispatching) from potentially competitive ones (production and supply, repair works and services); new structures responsible for separate activity types are being created instead of former vertically integrated companies which exercised all the above mentioned functions.


Generation, sales and repair companies will become mainly private and enter into mutual competition. On the contrary, State control tightening occurs in natural monopoly spheres.


Thus conditions for competitive electric power market development are being created, which implies that market prices are not regulated by the State, but formed on demand and supply basis, while market participants compete reducing their costs.


Goals and objectives of the Reform were determined by the Russian Federation Government Resolution № 526 of July 11, 2001 "On Restructuring the Electric Power Industry of the Russian Federation".


Taking into account further amendments to the regulatory and legal framework, goals and objectives of the Reform were concretely defined in the "Strategy Concept of RAO UES of Russia for 2005-2008 (5+5)".



Target Sector Structure




Companies being created in the course of the reform are mainly enterprises, specializing in separate kinds of activity (generation, power transmission etc.) and controlling corresponding profile assets. As far as separate activities are concerned, newly established companies surpass former regional monopolies: they either consolidate profile enterprises within several regions or become All-Russian.


Thus, trunk grids pass on to the Federal Grid Company, distribution grids are to be transformed into interregional distribution grid companies (IDGCs), functions and assets of regional dispatch administrations are transferred to the System Operator.


Generation assets are also consolidated into interregional companies of two types: generation companies of the wholesale market (wholesale generation companies - WGCs) and territorial generation companies (TGCs). WGCs contain power plants, specializing mainly in electric power generation. TGCs contain predominantly combined heat and power plants (CHPs), which generate both electric and thermal power. Six out of seven WGCs are being formed on the basis of thermal power plants, one (namely Hydro WGC) - on the basis of hydrogeneration assets. Thermal WGCs are constructed according to extraterritorial principles, while TGCs contemplate stations within neighbouring regions.


AO-Energo restructuring process was launched in 2003, when first pilot projects were implemented. These are restructuring projects of Kalugaenergo, Orelenergo, Bryanskenergo, and Tulenergo. In 2004 structural changes entered their most active phase. Restructuring process involved more than 30 companies. By April 2004 restructuring of the first regional power company (Kalugaenergo) has been completed, and by the end of the year 5 AO-Energos have been broken up into profile-based companies.


2004 also saw creation of interregional companies. During the last months of 2004the first three WGCs and two TGCs were created (and underwent state registration procedure). The RAO UESR Board of Directors decided to establish four IDGCs. Moreover, new dispatching vertical was practically formed in 2004: functions performed by regional dispatch administrations were transferred (with some exception) from AO-Energo companies to the System Operator.

In 2005 restructuring process involved most of AO-Energo companies, and considerable part of them has been split up by the end of the year. 2005 also saw establishment of most planned interregional companies: the last of seven WGCs has been registered by March, and by August four IDGCs and thirteen out of fourteen planned TGCs have been established.


In December of 2007 - January 2008 the target structure formation of all thermal WGCs and TGCs was completed, as well as the first stage of HydroWGC consolidation.


Spin-off of grid companies has been completed. All 56 trunk grid companies were established on the basis of reorganized AO-Energos.


In 2007, pursuant to the decision of RAO "UES of Russia" Board of Directors on the reconfiguration of IDGCS of April 27, 2007 and Russian Federation Government Resolution № 1857-r of December 27, 2007, the number of IDGCs was increased to 11 (excluding IDGC of the Far East).


Since September 1, 2006 the new rules of operation of wholesale and retail electricity markets have come into force. As a consequence, the wholesale electricity (capacity) market saw a transition to regulated contracts to be concluded between buyers and generation companies, the free trade sector (FTS) was liquidated, spot market - day ahead market (DAM) was launched. In accordance with Russian Federation Government Resolution of April 7, 2007 there are plans to replace regulated contracts by free (unregulated) ones by 2011. The rules of operation of retail markets suggest that gradual liberalization of retail markets should go in parallel with wholesale market liberalization. It is important to note that during the transition period electricity tariffs for the population will remain regulated.

Thus, in the course of the reform former monopoly structure of electric power industry is being liquidated: the majority of vertically integrated companies disappear, and new companies to be established within the target sector structure take their place.





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