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The Competitive Market of Power Industry: Love that has passed by
Date: 15.08.2011

The Competitive Market of Power Industry: Love that has passed by

On your mind: The necessity to reform the power industry. The need of transforming the power industry in Russia was gradually raising beginning from the last century’s Soviet 80s, when the demand started to outpace modernisation of production capacities. An overall crisis of 90s followed to worsen the situation further: while consumption volumes decreased considerably during that period, modernisation process had ceased completely. Technological level of the power industry in Russia was lagging far behind the progress of developed countries. Various regions used to face power failures and outrages, and industry enterprises lost their financial transparency. They lacked drives for increasing their production efficiency. And one of the main reasons was the market itself, closed for new, independent players.
Since 1992, the market of energy generation and energy transportation in Russia has been exclusively controlled by the EES of Russia (Unified Energy System of the Russian Federation) Open (this feature was added in 1998) Joint-Stock Company for Energy and Electrification, which factually represented the whole power industry of the country. As of 2004, the companies belonging to the Group owned 72.1% of production output or 69.8% of electricity and 32.7% of heat power transporting 96% of electric energy.
The total capacity of the Group’s companies made it the largest energy player of the world market. And the prices for its services were fixed by the Federal Tariff Service, in compliance with the national law on natural monopolies. The other industry aspects were left completely under the authority of the EES of Russia RAO. But due to objective factors discussed above, the necessity to change the situation radically has been under discussion since 1998.
For your home, for your heart, for yourself: The reform of 2002 – 2011. The main goal set for the reform was to increase the efficiency of energy enterprises by attracting investments. The natural monopolies were to be detached from potentially competitive businesses dealing with power production and distribution. Instead of vertically integrated companies new highly specialised structures were to appear.
With the EES of Russia reformed, vertical integration of power generating and power grids was eliminated. The state continued to control grids, distribution, and management, and the prices for its services were still fixed by the Federal Tariff Service. But private companies were welcome to power generating and distribution segments. During 2006 – 2008, power generating enterprises became private, and the EES of Russia ceased its existence on July 1, 2008.
The next stage of reorganisation has been completed by January 1, 2011. From now on, consumers pay free prices for electricity, and the population is switching to the new scheme beginning from 2014. Due to this contemporary exception, the share of the market priced electric power comprises about 40% now. And, in spite of expert forecasts, energy prices continue to rise.
The past, the future, the outcome: A counter-reform establishing a mega regulator?With no official celebration honouring completed reforms in the power industry, they could well continue: perfection knows no limits, especially when everything is totally imperfect.
No later than on August 10 of this year, the Community of Bulk and Retail Electricity Buyers Non-Profit Partnership that unites a number of large energy consumers including Mechel-Energo OOO, Rusenergozbyt OOO, Transneftenergo OOO, sent a letter to Igor Shuvalov, first vice-PM of the Russian Federation, with their propositions for improving the local power industry. Among their main claims concerning the current state of the power industry in Russia is lack of real competition as well as administrative measures of attracting investments in power generation. According to the Community, these factors are incompatible with foreign investment flow to the industry. It is worth mentioning that back in 1998 the similar background was followed by launching the energy reform.
The letter also underlines the general concern about consolidation processes in the industry increasing both vertically and horizontally. According to the Community, they result in less competitive wholesale market of electricity, while energy and power sellers strengthen their market positions.
Indeed, not long ago, on July 7, Gazprom OAO and Kompleksnye Energeticheskie Sistemy ZAO belonging to Viktor Vekselberg were announced to have signed an agreement on asset merger. The structures of Gazprom, which is now the largest asset owner in the power industry of Russia, are said to get 75% of shares in the new holding. The Ministry of Economic Development and the Federal Antimonopoly Service oppose the imminent transaction claiming it to violate the previous decisions prescribing the state capital to leave companies active at competitive markets. Until now, it is unclear yet if the transaction takes place but still it indicates quite clearly where the market goes.
And while the community is left in suspense looking forward to the final decision on the deal, the report of the experts committee on reforms in the power industry supervised by vice-PM Igor Shuvalov states: consolidation of assets means that investors are disappointed with the industry, and their disappointment is due to inefficient management. The industry lacks efficiency as it is managed simultaneously by several ministers, departments, non-profit partnerships and joint-stock companies. The proposed way out implies creation of a single mega regulator which would be in charge of the whole industry, like EES of Russia RAO used to.
Of course, a doubter would give up bright ideas of market pricing and competition at the power market. Monopolisation processes in one of the key segments that are so characteristic of Russia supplemented by concentration of state power in the industry would give him enough reasons to think so.
For your heart’s comfort: Conclusions. Nevertheless, there is one more scenario, and it’s a lot more positive. The formation of competitive market directly depends from additional investments. And for now, investments (along with the three other ”I” factors) are among the state’s priorities. Claiming to establish an international financial centre, Russia is also interested in a decent business image at the global level. It would be also interesting to see what comes in 2014, when the population is meant to pay free prices for electric power. And as far as a mega regulator is concerned, its emergence will surely face administrative challenges and several years to overcome them. Thus, the competitive market will be establishing by and by. Its formation will be agonizingly slow, but it will continue. Unless the market dies.

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