24 february 2010

Prime Minister Vladimir Putin chairs a meeting on investment in the power industry

Vladimir Putin

At a meeting on investment in the power industry

"Industrial production is again on the rise in the country, which <…> is spurring the demand for electricity. The Russian power industry must be ready to satisfy this growing demand, or we will again encounter a bottleneck at the post-crisis stage, the infrastructure limitations of economic growth."

Vladimir Putin's opening remarks:

Good afternoon, colleagues.

We have met today at the Sayano-Shushenskaya hydroelectric power plant to discuss two sets of issues.

The first concerns the progress made in the reconstruction of the Sayano-Shushenskaya plant. The second set of issues is wider; it concerns discussion of acute problems in the Russian power industry in general, development projects and investment programmes.

I'd like to remind you about the tragedy at the Sayano-Shushenskaya power plant. A large accident happened there on August 17, 2009. On August 21 we held the first meeting here, and six days later we prepared a list of government instructions on the plant's reconstruction. A government commission was set up and held four meetings, the last of which convened on January 29, 2010.

At that time we formulated the following tasks. The first was to prevent the collapse of the dam in the harsh winter conditions in Siberia, meaning spillways, etc. We also needed to organise the plant's reconstruction, ensure the enhanced operation of the other generating power plants, first of all thermal power plants in the region, and to prepare the grid system for additional loads in winter to ensure the supply of electricity needed by consumers.

Of course, all of these goals were set for the medium term but it was very important to attain them. I'd like to tell you about our results in this area. We have successfully achieved all of the goals.

The accident claimed 75 lives, and dozens were injured. Compensations of one million roubles were issued from the federal budget to the families of the diseased, and RusHydro allocated the same amount.

Measures are being taken to help the injured, in particular, to provide housing. In all, the company will allocate over 300 million roubles for social assistance to the victims.

Reconstruction work at the Sayano-Shushenskaya power plant is proceeding according to schedule and involves 2,500 people and dozens of special vehicles.

As much as 5.8 billion roubles was allocated for the plant's reconstruction in 2009; 2.8 billion roubles was provided for the construction of the onshore spillway.

The plant's sixth power unit was restarted today, which is a psychologically vital landmark. The event is also crucial for organisation and production because it will lower the load on Siberia's energy system and other generating facilities in the country. In addition, it is important for redistributing the load within the grid in a more balanced manner, which should ultimately lead to lowering electricity tariffs.

A package of measures is being implemented to protect the dam from technical damage such as icing, as I have said. Despite the temporary shut-down and unusually cold weather not only for Western Europe or North America, but also for Siberia, we have prevented threats to the power plant and surrounding territory.

To increase control over the power plant's dam, RusHydro signed contracts with four companies in this sector. Also, two of the least damaged power units, the fifth and the sixth units, have been inspected and trial runs have been conducted. The sixth power unit has been restarted, providing over 600 MW of electricity for the country. Actually, its capacity can be compared to a midsized power plant.

We plan to restart three more power units this year, the third, the fourth and the fifth. Over 10 billion roubles will be allocated this year for reconstruction at the power plant and 3.5 billion roubles for completing the construction of the spillway.

Under the project, the plant's 10 hydropower units are to be replaced with new ones of the same capacity but with improved characteristics. They are to be produced by Power Machines under a contract estimated at 11.7 billion roubles. Six power units are to be supplied in 2011 and the remaining four in 2012. On the whole, investment in the reconstruction and modernisation of the Sayano-Shushenskaya hydroelectric power plant will reach some 37 billion roubles.

Currently, the shortage of electricity in Siberia's grid is being compensated by the maximum use of thermal power plant and electricity transfer via Kazakhstan, as I have said.

We are working with Kazakh partners in a comprehensive manner. There are some problems, but on the whole this work is proceeding well. I think we should thank our Kazakh colleagues for understanding and for helping us to deal with the problems we have encountered in Siberia.

In general, I'd like to thank everyone who contributed and continues to contribute to the reconstruction work at the plant. Despite problems and a cold winter, we have revived the Sayano-Shushenskaya power plant.

The plant is being reconstructed with due account of the strictest safety requirements. New automated, control and measuring systems are being mounted, while automatic sluices will allow minimising possible risk. This modern equipment was made by European, American and Russian producers.

By 2014, the country's largest hydroelectric power plant should resume operation. All of its ten power units will be replaced with modern equipment with improved characteristics, as I have said.

I request that the government commission on relief work at the power plant to continue monitoring the provision of assistance to the victims and reconstruction of the power plant.

It was the first set of issues we have met to discuss. As you see, there were many positive achievements to report.

And now let us focus on the implementation of the investment programme in the Russian power industry as a whole. There are not as many positive things to report as we would like to. I will have to speak about things that are unpleasant, including to all those present here.

I'd like to begin with citing a very important figure. In January, electricity consumption in Russia reached the pre-crisis level, 103 billion kW. The decrease in January 2009 was 7.1% compared to January 2008, but we have restored the process.

Of course, the primal reason was a more severe winter than we expected, which was harsh even for Siberia. Record increases in electricity consumption were registered in many Russian regions, but the country's energy system worked without a hitch, including in Siberia, despite the shut down of the Sayano-Shyshenskaya power plant.

By the way, the last time we met here in August I drew your attention to the need to prepare electricity grids. And now I'd like to thank all those who tackled and resolved that problem.

Industrial production is again on the rise in the country, which has had its effect on electricity consumption and is at the same time spurring the demand for electricity.

The Russian power industry must be ready to satisfy this growing demand, or we will again encounter a bottleneck at the post-crisis stage, the infrastructure limitations of economic growth. Moreover, we should have sufficient reserve for emergencies.

One of the proposed solutions stipulates more active construction of power units, modernisation of power plants and decommissioning of expensive, resource-wasting and inefficient facilities.

During the reform of RAO UES, the new owners made serious commitments to invest in the development of the Russian power industry. A part of these commitments was financed by the issue of additional shares.

They attracted approximately 450 billion roubles. Although everyone here knows what it means, I'd still like to say that these 450 billion roubles are government funds allocated for the development of power generation during the RAO UES reform and the money our companies raised from the additional share issue. They received government funds, and these funds should have been used for development, for new construction projects.

According to the latest data, however, only 270 billion roubles of the above sum were spent directly on the implementation of investment projects, and 66 billion roubles were spent on current operation of the company, including the purchase of non-core assets that are not connected to the power industry. Funds were squandered or were used for speculative transactions. And nearly 100 billion roubles have not been used and are still sitting in accounts.

Last year we granted the generating companies' request and adopted crisis relief policies: We agreed to consider moving their construction project deadlines by a year or two, and to change the location of planned facilities opting for sites the investors found more suitable. However, even adjusted plans haven't been fully met.

We are certainly aware of the economic downturn and are therefore trying to help companies out. We are not only helping with regard to power generation, as we can see a whole range of problems. We are providing loans, guarantees, administrative and moral support. I'm sure you feel it.

We naturally expected companies to show responsibility in return. Unfortunately, not all of them proved responsible enough, and preferred to look for excuses instead of working.

They keep citing the recession and lack of demand and asking to put off the deadlines again to be able to commission their generating facilities four or five years later, but back out when asked to build a power plant in a region where demand is guaranteed and where the country needs more energy facilities (such as Sochi).

One eloquent example is the planned Kudepsta heat and power plant, which is needed to boost the Sochi region's energy sustainability. Several energy facilities have been invited to join the project - territorial generating companies TGK-2 and TGK-4 and wholesale generating company OGK-3, but all of them declined under various pretexts.

Other companies have asked us to extend deadlines for some of their projects, including OGK-4, OGK-3, OGK-2, TGK-2, TGK-4, TGK-5, TGK-6, TGK-9, TGK-11, TGK-12 and TGK-13.

At the moment, a total of 100 generating units should be under construction under the existing investment contracts. However, only 38 of these projects are making real progress. Preparatory works are underway for 14 more facilities, while the remaining 45 are still idle.

Much has been said about improving the investment climate and creating a healthy market environment, also in the power generation sector, but a civilized market implies mutual responsibility.

The government, on its part, is shouldering this responsibility and meeting its commitments. I can tell you now that I have signed an executive order today to allocate 53 billion roubles to build nuclear power plants.

The government has clearly stated its plans to liberalise the energy market and to develop transparent and predictable rules for it, and is fulfilling this commitment.

I also signed a resolution today defining the operating principles of the long-term capacity market. These principles will create a comfortable environment for generating companies to ensure their stable and profitable operation and an early return of their investment. The new rules are beneficial for everyone who is determined to grow and boost competitive positions on the market.

Yet, I would like to state very clearly that the right to benefit from the long-term capacity market advantages is only deserved by the companies that make good on their commitments to the government by investing in construction, modernisation and safety.

We do have such companies that stick to their commitments, and we are ready to sign legally binding agreements with them right away to document our mutual commitments.

In the future, we will make a company's access to the long-term capacity market advantages directly dependable on the progress of its investment programmes and abidance by its deadlines. These companies will have the freedom to set their own prices for energy.

I would like to assure you, ladies and gentlemen, that energy companies which are dodging responsibility and are reluctant to assume commitments will go straight to Mr Novikov, who will tell them precisely how much they should charge for their electricity. (Sergei Novikov is head of the Federal Tariff Service).

I have just looked at a list of companies making good on their obligations: It includes either state controlled companies such as Gazprom, Inter RAO UES and Russian Railways, or foreign companies, major foreign investors like Finnish Fortum, Italian Enel, and German E.On. One large Russian private company, LUKoil, is also on the list.

Therefore, our other private investors must have backed out. What kind of work is this? How about a civilized market and businesses' responsibility?

Let me tell you this straight away, for you not to take offence later: Penal sanctions will be used against those who "consume" the resources earmarked for investment or, worse still, pull these resources out of the business. The government has the required legal grounds to do so, including the Prosecutor General Office's functions, especially in the area of technological safety. There are indeed enough problems in this area.

More to the point, the commissioning of generating facility should be coordinated with the construction of a relevant grid infrastructure. Otherwise, starting new generators and boosting capacity becomes pointless.

There are two companies in Russia responsible for development of power grids, state controlled Federal Grid Company and Interregional Distribution Grid Company. Let me warn their management that their fulfillment of obligations will be strictly monitored as well.

Natural gas should also be promptly supplied to the new generating plants. Gazprom, which should be keenly interested in the expansion of its domestic consumer market, must give undivided attention to development of the gas supply infrastructure. Otherwise, independent producers will make their contributions to this project faster.

This last factor seems to frighten our Gazprom colleagues. However, if the company does not meet these goals promptly and in full, we will have to ask other companies to join in.

I would like to say a few more words in conclusion. I have already mentioned several companies that accurately meet their commitments - Fortum, Enel, LUKoil, Gazprom, Inter RAO, and Russian Railways. Unfortunately, there are others, which are not making every possible effort and are not doing what they have promised to do when they received state funds through additional share issues.

TGK-3 is majority owned by Vladimir Potanin; TGK-2 by Leonid Lebedev's company Sintez; TGK-4 by Mikhail Prokhorov's investment vehicle, Onexim; and Integrated Energy Systems (IES) by Viktor Vekselberg.

I have personally known all of them for years; in fact, we have been working jointly. Let me repeat that we have made every effort to support all of you during the recession. The economy is recovering; it is not out of the recession yet, but there is an upward trend. I repeat, we agreed to meet you half-way again by shifting the deadlines for investments. We won't be able to do any more. Please target all your efforts to meet your commitments.

In conclusion, I would like to say: The processes of building additional generating facilities, development of distribution grids and shaping an energy market are closely interrelated.

If energy deficit persists and getting connected to power grids remains a problem, what we are likely to get in the end is a "quasi-market" controlled by monopolies, while the interests of consumers, the economy, and the country are simply ignored. We must certainly prevent this situation and we are determined to do so.

Our mission is to create the most favourable environment for growth.

Companies in the non-financial sectors, businesses and municipal authorities must be confident that the industrial and social facilities they build, new residential housing will be timely supplied with energy, while connection to the grids will be fast, cheap, and corruption-free.

What's most important, this system should work across the country. There should be no discrimination between regions, such as "advanced" versus "backward" areas. We should avoid the situation where a region is labeled "backward" because of its remote location and lack of infrastructure, as used to be the case with Siberia and the Far East. We need a detailed action plan aimed at harmonising living standards and economic conditions in the different price zones.

This is about all for the beginning.

 * * *

Vladimir Putin's concluding remarks:

In conclusion, I would like to say that the power industry is certainly one of the crucial elements of a modern economy, including in Russia. This has always been the case and will remain so for a long time to come. It will be like that forever, because the power industry is the core of development.

Energetic measures connected with the reform of the power industry have been taken in Russia in the last few years. On the whole, the reform is proceeding well and in compliance with the timetable. We are working according to the approved schedule, with some minor lags. We launched the energy reform to create new sources of funds for modernisation and innovation in this crucial sector.

On the whole, we are attaining the outlined objectives, although the crisis has interfered and created some problems. They were compounded by the accident and tragedy at the Sayano-Shushenskaya hydroelectric power plant. But you can see that we are dealing with it well, and reconstruction work at the power plant is proceeding apace. After we have analysed progress of this work today, I am confident that we will rebuild the station, all of its ten power units, in accordance with the approved schedule by the end of 2014. We have allocated huge funds towards this end, but it is a substantiated spending.

There are reasons to assume that work will proceed according to schedule and with a high quality at one more new generating facility, the Boguchany hydroelectric power plant.

As for the power industry as a whole, I'd like to draw your attention to the need to honour our commitments unconditionally. I am referring to the commitments of the new owners of power generating facilities and the government. The government is working to fulfil its pledges, and state-controlled companies, foreign partners and some private Russian companies, such as LUKoil, are acting likewise.

I am calling on all partners in this process, everyone without exception, to work as planned. Unfortunately, we know that some of them, in particular TGK-4, have not even compiled their action plans. Just imagine: They still have no action plans!

Mr Prokhorov is the largest shareholder of TGK-4. He is well off financially; as they same in some quarters, he is in cash. He has the money. He spends his time talking with many officials. He has recently talked with me; I have very good relations with him. He is looking for projects on which to spend his money, but I'd like to remind him that he should honour his prior commitments first.

Or take OGK-3. Its largest shareholder, Mr Potanin, bought it for 81.7 billion roubles. And he also raised 81.7 billion roubles through an additional share issue, which means that he assumed ownership of a huge property for free. All right, good for him, but he must also honour his commitments under the investment programme. But he is not doing anything.

I have a special reason to mention E.ON. The German company raised 48 billion roubles through an additional share issue, and its investment programme is estimated at 95 billion roubles, and they are working on it. I don't want to quarrel, but plans must be implemented. For our part, I'd like to say again that we are prepared to extend a helping hand and to meet you half-way. But it should be a two-way road.

Everything in the electric power sector must be done with the highest quality and modern equipment, with due regard for the environment and with the use of innovative instruments and principles.

If we act in this manner - and this is the only way in which we should act - we will certainly succeed. And success is what everyone needs.

Thank you.