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Powering change in Russia's electricity sector

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EBRD finance will extend by 25 years the lives of outdated hydropower stations.

Anatoly Chubais, Board Chairman, RAO UES of Russia.

With its recent decision to lend 6.3 billion roubles (€185 million) to rehabilitate some of Russia’s most important hydroelectric power stations in the Volga river region, the EBRD’s total investment in Russia’s power sector is fast approaching €1 billion. Apart from the Russian government itself, no one has invested as much as the EBRD in helping to modernise the system.

The power stations, owned and operated by HydroOGK, account for nearly 10 per cent of Russia’s power supply. The cascade of power stations on the Volga and Kama rivers is the one of the largest renewable energy sources in south-west Russia. However the power station equipment is more than 40 years old and completely exhausted. The EBRD loan will extend the lives of these renewable sources of energy by another 25 years.

The loan to HydroOGK, which by year-end will be the world’s second-biggest hydropower utility after Hydro-Quebec, is part of the Bank’s long-term commitment to helping modernise Russia’s power sector. Doing so requires not just nuts-and-bolts equipment but also less-visible improvements in the electricity network’s organisation and management, from generation through transmission to distribution.

Blackout sheds light

Nothing could have better illustrated the urgent need for power sector reform and rehabilitation than the Moscow blackout of May 25, 2005. After almost half a century of service dating back to the Krushchev era, two electrical transformers in the Chagino power substation called it quits. The blackout affected an estimated four million people who got stuck in elevators, the subway and street traffic. Economic damage was estimated at $70 million and ranged from factory shutdowns and shop tills that could not operate, to problems on poultry farms where half a million chickens died.

It wasn’t just that the lights went out. Russians were shocked by the realisation that their country, so rich in raw energy resources, did not have the power infrastructure to keep up with their current healthy economic growth rate and increasingly comfortable lifestyles.

A year after it happened, the Moscow blackout has yielded positive results. Government leaders recently voiced support for previously-contentious reforms launched in 2001 by RAO UES, the country’s largest utility, and the power sector restructuring campaign has gained a new impetus.

Investment and reform

The Bank has been engaged in Russia’s power sector for six years, employing a two-prong strategy. The EBRD finances urgent investments to help reverse the decline in the country’s aging electricity system and to ensure it will be strong enough to meet the demands of the modern economy. It also facilitates the reform process aimed at promoting competition and increasing efficiency in the power sector. 

RAO UES estimates nearly $80 billion is required to modernise the sector by 2010. To meet those needs, blockages to investment have to be removed. “Russia and its utilities have to undergo a major transformation in the way they are financed and in the way they operate. The regulatory and market conditions have to be conducive if they are to have the financial capacity to fund and execute the required improvements,” says Varel Freeman, EBRD First Vice-President.

“The EBRD’s role is to facilitate the liberalisation of the electricity market, provide support to the regulatory authorities and ensure that private sector financial support is forthcoming. The role the Bank has played in syndicating its loans to private lenders, in particular the recent rouble-denominated loans to HydroOGK and Mosenergo (Moscow’s heat and power utility) is key in bringing foreign commercial banks to the Russian power sector.”

The EBRD’s first financing of RAO UES was a $100 million loan in 2001. It was used to finance restructuring and to provide support for the nascent ideas of introducing private sector and competition in the power sector to improve efficiency.

As part of that transaction, EBRD helped institute the RAO UES Restructuring Committee. Made up of key industry experts and high-level state officials, the committee has grown into the ‘mastermind’ of the reform and its recommendations lie behind each and every RAO UES decision in that regard. 

Improving the system

“With EBRD support, RAO UES of Russia is restructuring the electricity sector to develop a liberalised, competitive electrical power market, reduce losses and improve efficiency,” says Anatoly Chubais, RAO UES Board Chairman.

“One of the most significant reforms made to date is RAO UES’ decision to spin off its hydro assets into an autonomous company, HydroOGK, thus consolidating hydropower management and investment resources. This enabled the Bank to structure a loan to the HydroOGK to finance the key upgrades to the Volga-Kama cascade,” explains Nandita Parshad, Deputy Director of EBRD Power and Energy banking team.

In 2005, the EBRD became the first international financial institution to tap the Russian bond market in order to raise the roubles needed to fund a substantial local currency lending programme. The HydroOGK loan is one of the fruits of an initiative launched to meet surging demand from Russian clients for loans free of foreign exchange risk. “Our operating cash flows are in roubles so we are committed to borrowing in national currency to avoid exposure to foreign exchange risk,” says Vyacheslav Sinyugin, CEO of HydroOGK.

The financing will be in two parts: the EBRD A loan, with a term (or tenor) of 14 years, and the B portion with a 10-year tenor, syndicated to private banks. “Our investment time frame is very long-term so we need long-tenor loans,” says Mr Sinyugin. “This borrowing facility is a breakthrough: no other Russian companies have ever had such long rouble-denominated loans. I believe the long tenors result from EBRD’s confidence in the RAO UES reform and HydroOGK’s financial stability and prospects.”

Press release: 6.3 billion rouble loan for renewable energy in Russia

By Kate Dunn, Senior Communications Adviser
Contact: Power and Energy Banking Team

8 September 2006