Harmful conservatism

The meeting of the leaders of power producing companies of the CIS in Yalta in May, and seemingly reached agreement on creating the common power market with non-discriminatory access to the buyers of electricity for the exporters, may act as a trigger for the long brewing tendencies on the markets of the member states. According to Russian “Kommersant” newspaper, only Ukrainian and Moldovan power companies didn’t participate in the agreement. The main unofficial reason stated by the Ukrainian managers was reluctance to compete with their Russian colleagues, which benefit from government support (Gasprom still provides large amounts of gas to RAO UES for low prices).

 Nikolay Drozd

The reform of Russian power industry, which Anatoly Chubais, the head of RAO UES, has been talking about for so long, and the imports of electricity to Russia considerably changes the situation on the markets of Central Asia, and to a lesser extent in Kazakhstan. Besides the appearance of the alternative attractive Russian market, the situation in Tajikistan and Kyrgyzstan changes due to the intention to carry out unprecedented large investments into hydropower. Probably, partially state-owned Kazakhstani companies will be among the investors in Kyrgyzstan. Sauat Mynbaev, the Chairman of the managing board of the state assets managing holding, mentioned that, besides economic benefits, Kazakhstan’s investments are based on the apprehension of becoming dependent on both the Southern and Northern neighbour. Several years ago the experts were sceptical that the project of building Kombaratinskaya hydro-plant in Kyrgyzstan with the outlet to Southern Kazakhstan would repay. These assessments haven’t changed much during the time of brewing of the project.
Russian investments into Kyrgyzstan’s hydropower without Kazakhstan’s participation, besides changing the situation in the Southern part of the country, would decrease Kazakhstan’s influential power, such as influencing the discharge of water by the hydro-plants in winter. Besides, the hypothetical growth of electricity transit from Kyrgyzstan to Russia can lead to rise of the tariffs in the Southern part of Kazakhstan, which experiences power deficit. In this case Kazakhstani power engineering specialists would have to create new schemes of efficient use of Zhambylskaya hydro-plant, which is donated by the government in winter. Anyhow, these scenarios will probably be realized in their milder form.
The reason for Russian reform was the fact that production of electricity was falling behind the consumption, which is rising in Russia and Kazakhstan at the rate of more than 5% per year due to economic growth. With all this, it is very difficult to assess the effectiveness of Russian and Kazakhstani reforms, which include investments into power generation. These two reforms are 10 years apart and they are carried out in opposite economic conditions – investment hunger and excess liquidity.
The future of the industry will also be influenced by the fact that the privatization of power generating assets in Kazakhstan for very low prices didn’t require rapidly rising tariffs and quick repayment of the invested capital. Large industrial companies, which had the access to the wholesale electricity market, enjoyed the low prices for a decade. To a high extent this happened at the cost of depletion or insufficient replenishment of power generating assets.
Arrival of portfolio investments to Russian market with very high privatization prices of power generating companies will increase the tariffs. The UGC (United Generating Companies) will probably be an exception, because it was bought be large extraction companies, which will possibly keep low tariffs and invest into power-plants baring in mind their “social responsibility”.
However, the changes on the power markets, including the one of Kazakhstan, are unavoidable, within 3 – 5 years the economy will face a deficit of generating assets. The attempts of the players on the market to communicate to the changing governments the need to raise tariffs and create favourable investment climate weren’t effective. By the way, the investments made within a time lag with respect to the investment projects in Russia and Central Asia, perhaps, would have given strategic advantage if they had been made during the brewing time of the tendencies, thus, allow Kazakhstani companies expand to Russia. Conservatism in decision making has lead to absence of investment mechanism, which had a chance to form several years ago. Nevertheless, power industry is said to be among the ones where partnership between the government and private sector can develop very intensively. The main problem is to show the potential investors, which are pension and investment funds, the mechanism of repayment, besides the government guarantee, which provides only minimal profit. The first project to solve the problem is on the initial stage of its realization, the project is building power transmission line from Kostanayskaya oblast to Aktyubinskaya oblast. Obviously, the project cannot be financed only by private investments, because taking into account the interest rates; the transmitted electricity would be much more expensive than currently imported Russian electricity. Government guarantee decreases the interest rates; while private sector can make the project profitable, decrease the costs of construction and make the tenders competitive.
Another example of investments made using the stock market is the borrowing made by American AES company for reconstruction of one of its Ust-Kamenogorsk power-heat-stations. An alternative way would be the investments of state owned companies, as in the case of Kazmunaygaz and power industry of Almaty. This way would probably be the easiest way out from the current situation with growing gap between production and consumption of electricity. The largest regional industrial companies can also play the role of the “guardians”. It is unclear how this way of fulfilling the “investment necessity” corresponds to the sense of the reform, which started in 1990s. However, It seems that private or mixed investments would be more efficient in making the industry competitive, and the government would have less power over the growth of tariffs. Currently the growth of tariffs, for example, in the case of the supplies of AES, causes a stern reaction from the government bodies, such as antimonopoly agency.

Anatoly Chubais, Chairman of Board of Russian Open Society «UES of Russia»:
“I’ve been cooperating with KEGOC for 10 years, virtually from the time of its establishment. I think the improvements in the company, and power industry of Kazakhstan in general, deserve the highest appreciation. During this period of time KEGOC has turned into a modern business structure from a company with conservative notion of power industry. The company, besides understanding the importance of technology, reliability and equipment, also understands the importance of business. In my opinion, KEGOC is a synthesis of the best in traditional understanding of power engineers with the best of modern business culture.”

Wishes:
“I think that at the beginning, when the company has just been established, they had a colossal amount of problems… today it may seem that all of the problems have been solved – it is the biggest danger. Thus, my wish is: Don’t relax, don’t think that God will always help you, on the contrary, set new tasks and complete them.”