Are you sure?

Russia power producers face hard years

Russian power consumption has bottomed out at 2006 levels and it could take years for producers to claw back lost ground after the sharp downturn of recent months, an industry regulator said.

Some of Russia's electricity generators - which have been recently sold off to foreign and local investors - are at risk of operating at a loss as prices tumble, the regulator said.

In February, electricity use fell 4.8% year-on-year after a January decline of 7.7%, which corresponded to Russia's worst drop in industrial output on record.

For the rest of 2009, the decline in power use will stay in the range of 5%-7% year-on-year, because consumption in industries such as metallurgy is no longer dropping, said Vladimir Shkatov, deputy head of the Market Council.

“It is possible that we will see another wave to this crisis, but the opinions on this are still quite varied,” Shkatov told a press briefing.

The sharp drop in power prices has meanwhile put electricity production at risk of becoming a loss-making business in the next two or three years, he said.

Prices have fallen by up to a third this year compared with 2008, causing stark irregularities in the market for power.

In many regions, state-regulated power prices paid by the population are higher than the unregulated prices paid by large industrial consumers, said Sergei Popovsky, another deputy chairman of the watchdog.

“This means that the current downturn will very soon impact these firms' economic efficiency,” Popovsky told the briefing.

Some power stations, particularly in the regions of the Ural mountains, are already operating at a loss, because the price of power on the market has fallen below the cost of producing it.

“Over the next two or three years, some (power generators) will face losses. That is absolutely clear,” Shkatov said.

All of Russia's power producers were sold off between 2005 and 2008 to foreign and local investors as part of a sweeping reform of the sector.

The former state power monopoly Unified Energy System (UES), which organized the privatization, had predicted demand growth of 4%-5% every year through 2011.

This prospect attracted a wave of interest from investors, who spent billions of dollars acquiring the firms. The investors include Germany's E.ON, Italy's Enel, Finland's Fortum and Russia's Gazprom.

But the optimistic forecasts of UES have now been turned upside down by the financial crisis, and the power sector will likely spend at least two years recovering, Shkatov said, citing preliminary estimates.

“No one - not the energy ministry, not the regulators - can say even roughly what the next three years will hold,” he said.

This uncertainty is especially painful for the power sector, which depends on long term supply contracts to lock in profits, justify expansion and prove their future solvency to banks. In an unstable market, it is not feasible for power producers to sign such contracts, Svetlana Zholnerchik, also a deputy head of the Market Council, told the briefing.

“The firms are telling us, 'Think about it. What if I sign a contract, build the turbines to honor it, and then the firm meant to consume that power goes belly up? What then?'” (Reuters)