Gazprom to Invest $9.2 Billion in Russian Power Sector Until 2012

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Researched by Industrial Info Resources (Sugar Land, Texas)--Russia is the world's fourth-largest user of electricity, but growth in demand threatens to outstrip supply capacity because of limited investments in generating facilities. Power cuts and blackouts during the high-demand winter months have become common occurrences. Now Russia's giant oil and gas power company OAO Gazprom (OTC:OGZPY) (Moscow, Russia) hopes to change the bleak scenario with heavy investments designed to further develop the country's Power Industry.

Regulated power pricing was seen as a major problem, as the regulated prices were an incentive for increased consumption, simultaneously dampening enthusiasm for new investments. In 2003, a plan was formulated to comprehensively privatize the Russian power industry by breaking it into chunks that could be sold off to private companies, with the state retaining control of the national and regional grids.

Until 2008, the Russian electricity sector was effectively under the control of an organization known as Unified Energy Systems (UES), which was responsible for maintaining the complex of generating plants and grids. Under the deregulation plans, UES was virtually dissolved in June 2008, when foreign electricity companies such as Germany's E.ON AG (OTC:EONGY) (Dusseldorf), Finland's Fortum Oyj (HEL:FUM1V) (Espoo), and Italy's Eni SpA (NYSE:E) (Rome) acquired some of the Russian power generating companies. However, not all assets were sold to foreign companies. Gazprom bought the four most strategically important assets, which supply power to Moscow and St. Petersburg.

Gazprom's power strategy is aimed at investing heavily in these assets, together with building new generating capacity. The plan is to increase installed generating capacity from the 36,000 megawatts (MW) present in 2008 to 41,640 MW by 2015, an increase of 15%. This will be achieved by upgrading the Mosenergo Moscow region with the construction of a combined cycle plant during 2009-10 and the installation of additional generating capacity of 2,000 MW at the TGC-1 plant in St. Petersburg by 2015, with an investment of about $3 billion. Other upgrades are planned for the OGK-2 company assets, designed to add an extra 1,460 MW by 2015 with the construction of two coal-fired generating units in Troitsk and Stavrapol and a combined cycle power plant in Serov with an investment of $2.56 billion.

The Kirishi State district power station will be modernized and two coal-fired generating units will be installed at the Novocherkassk and Cherepovets power stations for the OGK-6 company. These upgrades and new plants, which will be commissioned by 2015 and provide an additional 1,270 MW of generating capacity, will entail an investment of $2.24 billion.

New facilities are planned for Kaliningrad, a Russian exclave located between Lithuania and Poland, where a second power generating unit of 450 MW will be commissioned in 2010 with an investment value of $700 million. In Adler, on the Black Sea coast, another investment of $700 million will be made to set up a 360-MW combined heat and power (CHP) station. Smaller investments of about $300 million each will be made during 2009-12 to construct power stations at gas processing plants located in Astrakhan and Orenburg. Outside Russia, an additional power-generating unit may be set up at the Kaunas CHP plant in Lithuania, following the closure of the Ignalina nuclear power plant, which is scheduled to be shut down at the end of 2009.

Apart from Gazprom, foreign companies that have invested in the Russian power sector have been affected by the economic global downturn. Fortum, for example, has reaffirmed its commitment to integrating the Russian power utility TGC-10, in which it has a controlling interest, but is likely to postpone about half of its planned investment of $2.8 billion by up to three years.

Global power companies had promised to invest $30 billion in the Russian power sector at the time of the selloff. However, some of these companies have expressed doubts about the validity of Russian claims pertaining to the potential of the Russian power sector. E.ON, for example, is considering holding off on its proposed investment of $2.3 billion that was to be made over a period of 12 years.

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