Russia’s power struggle [NGW Magazine]

A sweeping modernisation programme is under way in Russia’s electricity sector, with gas-fired power being the main focus of the upgrades.

But industry sources say the scheme is unlikely to lead to major efficiency gains, as many of the projects selected so far are better described as running repairs rather than performance enhancements, and so better covered out of the owners’ funds.

And much of the capacity slated for overhaul also belongs to larger state-owned players such as Inter RAO, whereas foreign operators have largely been left out. The modernisation drive could therefore result in further industry consolidation in the long run.

Russia produces around 55-60% of its electricity from thermal power plants (TPPs), some of which were built as far back as the 1960s and are badly in need of upgrades. Gas-fired plants account for around three quarters of capacity.

The government began drawing up plans last year to modernise some 39 GW of generation – equivalent to around a quarter of total thermal capacity – at a cost of rubles 1.9 trillion ($29.5bn) by the early 2030s. Prime minister Dmitry Medvedev signed off on the project in January, whereby power plant operators will receive a guaranteed return on their investments in upgrades through long-term capacity-supply agreements (CSAs) with consumers.

A similar subsidy system has been employed to spur the development of Russia’s power industry since the 2000s.

The government expects operators to recoup their outlays within 15 years, receiving a 14% base rate of return on investment. The state-owned system operator (SO) collected bids in March for the first stage of the programme, for upgrades taking place between 2022 and 2024, and preliminary results were published in early April.

The bulk of selected projects were at power plants controlled by Inter RAO, Russia’s biggest generator. Upgrades proposed by the state giant will take place at plants that already have 5.1 GW of capacity, out of the 8.6 GW of post-modernisation capacity that was chosen.

Subsidiaries of Gazprom, Russia’s national gas concern, secured funding to modernise plants with a further 640 MW, while private domestic players Irkutskenergo and Siberian Generating Company (SGC) won funds to refurbish plants that contribute just under 1 GW of combined capacity.

The only foreign operator to be included was Unipro, a division of German energy group Uniper, which operates over 11 GW of generation capacity across Russia. The two other international players with large footholds in the country’s power sector, Finland’s Fortum and Italy’s Enel, failed to make the cut, although Fortum is the biggest shareholder in Uniper and seeking control.

A further 1.65 GW of capacity will be involved in the first stage of the upgrade scheme. But instead of an open tender, these projects will be selected by a government commission.

Criticism has mounted over the way in which the modernisation programme has so far been conducted.

According to Russian business daily Kommersant, the Community of Energy Consumers took aim at the scheme in a letter it filed with the government on May 15. The lobby group’s head Vasily Kiselev complained that the first stage of projects mostly consisted of “medium and low-capital repairs”, designed to extend the working life of outdated equipment rather than representing extensive upgrades.

Indeed, many of the projects replace only certain components of gas turbines and other core equipment instead of entire units. Some are for the construction of new secondary facilities, such as coal ash dumps, cooling towers and pumping stations.

The projects also add relatively little new capacity, estimated by the SO at 336.8 MW. Kiselev repeated calls for the base rate of return on investments to be lowered from 14% to 10%, to prevent energy prices rising too steeply. He also demanded that higher standards of efficiency for projects be enforced.

Others have argued that the programme unduly favours large state firms such as Inter RAO.

Upgrade projects were selected based on capital expenditure per MW of capacity, putting stations with larger capacities – many of which are run by government-owned companies – at an advantage.

The final subsidy formulae were published at the end of January, giving operators only until March 13 to finalise their choice of projects and to file technical documents.

This meant they had just six weeks to draw up detailed long-term forecasts for energy production and demand, as well as calculate the operating costs. According to a source at one private operator, this short time frame put non-state companies with multiple shareholders at a disadvantage, because of their slower decision-making process. Worse, the source asserted that state companies with good connections in government may have been privy to the terms and conditions of the programme in advance.

“There is an unspoken understanding that the larger state players are benefiting from the method of the programme,” a source at another power plant operator said.

There is little information on how and when the government will select the remaining 1.65 GW of capacity under the first stage.

“No one understands this process; there is no transparency,” the first source said. “But of course we have applied [to take part].”

As part of a broader import substitution drive, Russia has also introduced local content requirements in the programme. The government wants all turbines, generators and other key equipment to be Russian-made, but industry sources have raised concerns that this may drive up costs and cause delays.

Russia’s power industry currently relies heavily on imported equipment. Critically, there are several commonly-used models of mid- and high-power gas turbines that Russia cannot yet manufacture domestically.

Inter RAO is in talks with General Electric (GE) to localise production of larger 185-195 MW turbines, but the two are yet to strike a binding deal.

Once the remaining first-stage projects are selected, focus will move onto the second phase of the programme, for upgrades due for completion in 2025. Bids in this round will be accepted up until September 1. Tenders will then continue on an annual basis up until 2025.

The stakes are high in Russia’s modernisation drive, given the core role that gas plays in the country’s energy mix. The way in which it is implemented moving forward will affect supply security and power costs for decades to come.