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Interview

with Ivan Dmitrievich Grachev, Chairman, State Duma Committee for Energy

30.01.2013 / Energyboardroom

The State Duma Energy Committee plays an important role in shaping the legislation of the Russian power sector. Amendments to existing legislation, such as the state regulation on the production and the use of coal in the sector, have been some of the recent topics on the Committee’s agenda. From a legislative point of view, what are some of the key laws that still require further changes in order to guarantee better progress of the Russian power sector?

In my view, the reforms of the power sector in Russia have not been carried out properly. The foundations of these reforms lied in the fact that modernization would only become possible through market mechanisms. There is a strong disparity between the money needed for modernization and the revenues that can be raised from the end-user side.

As a result, the system degraded and its equipment depreciated. The market-based price formation system does not bring a fair price and does not correspond to the capacity we have put in place. Therefore, we need a substantial change in the legislation of our energy sector, and thermal energy in particular.

We need federal investment programs specific to our energy sector. Moreover, we require better regulations around energy efficiency. All in all, drastic changes are required.

You have already had several conversations with the Federal Tariff Service as well as the Minister of Energy to discuss the issues that currently exist with regards to electricity tariffs in Russia. Where do these discussions stand today and what do you propose?

Looking back at the resources needed to modernize the system, there are different estimates. Yet, even if we divide the smallest estimates by the population and a time frame of ten years –for instance- we need to understand that these targets are not achievable.

We have to define which of these investments –such as infrastructure or power stations– will be handled by the government, and which investments will be taken on by private companies. Then, we will be able to understand which tariff programs will be suitable for the population.

As private investors entered the market during the reforms, it was not only important for them to purchase generation assets. They also had to commit to investing in new capacity before 2020 in line with the Government scheme. Have these investments been completed? How satisfied is the Russian government with the investments that have been made on behalf of the private sector?

As far as I am aware, the majority of the private investors did not satisfy these requirements. This was already obvious at the beginning of the reforms, because there was a clear gap between the cost of these investments and the capitalization of these companies.

The cost of producing one kilowatt in Russia, for example, lies around USD 3,000. The capitalization per kilowatt, however, lies around USD 300, which explains why there cannot be that much investment in this field.

There are obviously some exceptions, related to either the richer regions in Russia or specific energy-intensive projects such as aluminum smelters.

Experts of the World Bank have stated that the possibility is there to halve energy consumption in Russia, leaving an immense potential for better energy efficiency. Can you enlighten the readers on the steps that have already been taken on this front?

Based on the fact that Russia uses twice as much energy as it actually needs vis-à-vis its GDP, I can agree with this statement. The main law on energy efficiency –Law 261– has been passed, but included two major mistakes.

The first is an increase of bureaucracy. Saying to a population that certain equipment for energy efficiency becomes mandatory is one thing, but assuming they will automatically invest remains an illusion. In reality, if someone does not have the financial resources to make these upgrades, even a written law cannot enforce the investment.

A second illusion that foreign experts contend, is the fact that electricity price increases will automatically result in energy efficiency. It is a fact that the price of electricity has increased by a factor of 12 to the dollar during the reforms, while this had no impact whatsoever on our level of energy efficiency.

Therefore, we must understand what role the government will play in the modernization of the sector’s infrastructure and equipment. From then onwards, we will have to build effective legislative mechanisms that will allow us to earn on energy efficiency.

You have previously made several public statements on the importance of prevention and safety in the sector. Accidents are inevitable of course, whether it is the Sayano-Shushenskaya Dam incident in 2009 in Russia, or the Fukushima disaster in Japan last year. In your opinion, what steps can be further taken to increase awareness and enhance prevention with regards to safety measures and standards in Russia’s power sector?

The 2009 incident at the Sayano-Shushenskaya Dam had two causes: lacking investments and profit prioritization. Safety, however, should be just as important as profit. Therefore, we will amend the law on investment programs to address these issues.

On the nuclear side, I was already of the opinion that nuclear capacity should be eliminated even before the Fukushima disaster took place in Japan. I am also convinced that this ‘phasing out’ will continue to take place in Europe.

How does this reflect on Russia’s Energy Strategy 2030 then, which aims to double nuclear capacity in the country by 2020?

Russia is a very different country. Looking at the ecological limitations, the size of the territory is a very important aspect. Russia has this size in its advantage. In Eurasia, Russia is the only country that has the capacity to increase its generation –from both nuclear and other sources– by 100 percent.

You attended a press conference on September 17, 2012, where the impact of Russia’s recent World Trade Organization (WTO) accession on its energy sector was addressed. Have any conclusions been made whether there has been an impact –either good or bad– on the power sector?

The impact of the WTO accession on the power sector has remained limited, mostly because foreign investors had already been well represented in our country before the accession. The generation niche, for instance, had already been well developed and was already competitive. The strengthening of our currency –the Ruble– is a far more important factor than the WTO accession.

As for gas, however, some problems will come forth out of the accession. This is because several conditions of the agreement are not clear and may have a double meaning, which in turn can result in legal actions. In fact, this has already taken place with regards to Gazprom in Europe.

Whether this is good or bad, I am convinced that if Europe succeeds in liberalizing the oil and gas sector, price fluctuations will be very high and risk will increase. This, in turn, will have its impact on all of our Northern projects, such as the Shtokman Project. In practice, this will result in an increase of prices by a factor of 3 in Europe.

I am also convinced that Russia does not need to hide the truth: in future sustainable development, Russian energy sources will be needed in both Europe and Asia. A long term stabilization agreement for both price and volume is key to further investment.

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