rao ues of russia: investment phase of the reform
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RAO UES of Russia: Investment Phase of the Reform. A. B. Chubais Chairman of the Management Board RAO UES of Russia. 10th Annual Investor Conference "Russia: Looking into the Future" June 20, 2006 Moscow. 1. Investment Phase of the Reform: - PowerPoint PPT PresentationTRANSCRIPT
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RAO UES of Russia: Investment Phase of the Reform
A. B. Chubais
Chairman of the Management Board RAO UES of Russia
10th Annual Investor Conference"Russia: Looking into the Future"
June 20, 2006Moscow
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1. Investment Phase of the Reform: Essence, Concept, Volumes and Mechanisms …………………………. 3-9
2. Structural Transformations …………………………………………………… 10-12
3. Market Liberalization ……………………………………………………………. 13-14
4. Conclusions ……………………………………………………………………….. 15
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Investment Phase of the Reform: Essence
Power Industry Reform: Investment Phase(2006–2008)
Completionof structural
transformations
Liberalizationof electricity
markets
Attraction of large-scale long-term investment
in the Russian electricity industry
4
Investment: Concept and Volumes
Restructuring Concept
Investment annually required for the electricity industry:
about $7 billion in 2006, about $20 billion a year from 2008
Investment Deployment Concept
Budget financing
Private investment
Industry'scompetitive sectors (primarily, thermal generation)
Industry'snatural monopolysectors
Large-scale investment needs to be attracted,not after the completion of the reform, but during its final phase! !
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Investment in the Russian Electricity Industry:Demand
Source: RAO UESR estimates; material for the June 7, 2006 session of the Russian Government
2006–2010:
Electricity industry's demand for investment: about 2.3 trillion rubles (over $85 billion), including generation demand: about 1.28 trillion rubles (over $47 billion)
2006-2010
9
21.8
38
0
10
20
30
40
2001-2005 2011-2015
GW
Commissioning of generation capacity in Russia:actual and demand
1.6
2.5
3.9
6.67.2
0
2
4
6
8
2006 2007 2008 2009 2010
GW
Capacity commissioning
dynamics, 2006–2010
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Investment in Competitive Sectors:Major Mechanisms
Thermal generation is primary investment target
2/3 of Russia's total power generation
Additional issue of shares in Wholesale Generation Companies (WGCs) and Territorial Generation
Companies (TGCs)
Investment Guarantee Mechanism
Direct private investment
in local projects
Private placement
Public placement
Projectfinancing
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Potential Candidates for the First Placements of Additional Shares
Company Share held by RAO UES of Russia
before additional issue
Smallest possible share to be held by RAO UES of Russia
after additional issue
Largest possible additional issue
(percentage of current authorized capital)
WGC-3 59.72% 25% + 1 share 138.7%
WGC-4 89.6%* 50% + 1 share 79.2%
WGC-5 87.7% 75% + 1 share 16.8%
Mosenergo 50.9% 25% + 1 share 103.5%
TGC-9 50.03% 25% + 1 share 99.9%
* - Upon completion of company formation (Q3 2006)
Fundamental principles for defining the exact volumes, time limits, and sequence of each additional issue are:
• Investors' actual demand for additionally issued shares• Market trends: maximize placement price • Provision of funds for companies' investment projects in specified volumes and within the required time limits
!Figures shown in columns 3 and 4 define the limits of each additional issue.
None of these figures are an end in itself.
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Investment in Competitive SectorsInvestment Guarantee Mechanism
Essence:
to compensate the investor for the difference between the electricity price formed in the marketand the price necessary for the investment project payback
Total generation capacity to be constructed using the Mechanism
in 2006–2010:
about 5,000 MW
The first projects will be implemented in the following energy systems: Tyumenskaya, Tulskaya, Sverdlovskaya, Kuzbasskaya, Tomskaya
Investment Guarantee Mechanismapproved by a Government Resolution in December 2005
2006: the first bids to attract investment through the Mechanism
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Special purposeinvestments Loans
VAT refundand othersources
Additional issue of shares inFederal Grid Company, System
Operator, and Hydro WGCto be transferred to the
Government*
Federal Grid Companyof Unified Energy System
(FGC UES)
System Operator –Centralized Dispatching
Administration (SO – CDA)Hydro WGC
* Funds from the FederalBudget required topurchase sharesin 2007–2009: 160 billion rubles
* Funds from the FederalBudget required topurchase sharesin 2007–2009: 5.02 billion rubles
* Funds from the FederalBudget required topurchase sharesin 2007–2009: 39 billion rubles
Investment in Natural Monopoly Sectors:Major Mechanisms
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Structural Transformations and Market Formation:Main Results as of mid-2006
Electricity Industry Reform (2001–2006)
Structural Transformations Market Formation
• 7 out of 7 WGCs, 13 out of 14 TGCs, 4 out of 4 Interregional Distribution Grid Companies (IDGCs) established
• Federal Grid Company and System Operator established and in operation
• Unbundling by activity type completed in 57 out of 72 regional energy companies
• Shares in 83 new generation, grid, sales, service and management companies placed in the Russian stock market (including shares in WGC-3, WGC-5, and TGC-3)
• Free Trade Sector of the Wholesale Electricity Market established and in operation (annual trade volume is about $3.5 billion)
• Competitive balancing electricity market in operation
• All large generation companies brought to the wholesale market (as from January 1, 2006)
• New model formed for the wholesale electricity and capacity markets (the model is based on a bilateral contract system and competitive markets)
• New rules developed for the functioning of retail electricity markets
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Structural Transformations: in the Short Term (from August 1, 2006)
Structural Transformations
Preparatory works for share placement inthe first WGCs and TGCs
First Reorganization:pro rata distribution of shares
General Meeting of Shareholders ofRAO UES of Russia (November 2006)
Board of Directors of RAO UES of Russia(June 23, 2006)
• Selection of 1-3 generation companieswith pro rata distribution of shares(candidates: WGC-3, WGC-5, TGC-5)
• Decision on the additional issue and placement of shares in 3–5 Thermal WGCs and TGCs in the stock market
Board of Directors of RAO UES of Russia (July–September)
• Approval of specific characteristics of the additional issue and placement of shares in WGCs and TGCs based on the list approved on June 23, 2006
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Structural Transformations: in the Medium Term (2007–2008)
Share placement in the rest of TGCs and WGCs
Structural Transformations
Second Reorganization:pro rata distribution of shares
General Meeting of Shareholders ofRAO UES of Russia (2008)
Board of Directors of RAO UES of Russia (2007–2008)
•Unbundling of RAO UES of Russia• Pro rata distribution of company`s assetsamong shareholders• Transfer of functions to the Government and to the power infrastructuralentities
• Decisions on the additional issue andplacement of shares in WGCs and TGCs
Possible additional decisions:
Sale of minority shareholdings inthermal generation companies
Direct equity in project finance investments inthermal power plants SPVs
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Market Liberalization: in the Short Term (from August 1, 2006)
Launch of short-term RBCs(with a term until the end of 2006)
Market Structure (from August 1, 2006)
Regulated Bilateral Contracts (RBCs)
Competitive Markets
The 2007 State Budget should fund the termination of
cross-subsidies
• Status of the Supplier of Last Resort• Translation of the Wholesale Market price to retail consumers in the case of deviations from contractual volumes
Day-Ahead Market (spot)
Balancing Market
New rules in the Retail Market
!!
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Modifying and Supplementing Market Structure
Transition to the long-term RBCs(with a term of 3 years)
Capacity Market
Ancillary Services Market
Retail Market• All new generation to be commissioned into the free market (spot or Free Bilateral Contracts). • Synchronization of liberalization processes in
the wholesale and retail markets• Termination of cross-subsidies
Competitive market through auctions held by SO
• Transition from tariff-based capacity sales to competitive capacity trade at auctions held by SO• Transition from one-year auctions to long-term auctions
• Gradual market liberalization: within a range from 5% to 15% a year(5% from January 1, 2007)• Voluntary exit from RBCs and entry into Free Bilateral Contracts, spot market
Market Liberalization: in the Medium Term (2007–2008)
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Investment Phase of the Reform: Impact on Investors – Impact on the Electricity Industry
Financial stability in afree market
environment
Predictable payback and financial profitability of
investment projects
Growth in capitalization of energy companies and
their appeal as an investment destination
Implementation of large-scale investment projects,
satisfaction of growing demand for electricity
Investors Power Companies
ROI guaranteesFavorable conditions to
attract investmentInvestment Phase
of theReform