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Interview

with Oleg Budargin, Chairman, Federal Grid Company

20.02.2013 / Energyboardroom

Mr. Budargin, we understand that you started your career in Norilsk, where you gained vast experience in managing one of Russia’s largest companies – Norilsk Nickel. Today, you are in charge of the federal electric grid, another one of the Russian Federation’s strategic assets.- Based on your experience, how would you describe Federal Grid Company (Federal Grid) as a business today?
Federal Grid was created 10 years ago during the reorganization of Russia’s electric power industry. I believe this to be one of the most successful decisions. Today, the government owns a 79.55% stake in the company.
Federal Grid is the exclusive operator of the unified national electric grid. At present, the company operates approximately 125,000 kilometers of transmission lines and over 850 high-voltage substations. These are very important assets.
During the past 10 years, our team of almost 25,000 people has consistently proven its ability to meet its most important task: ensuring reliable power supply for consumers.
The rate of incidents at our facilities has been decreasing every year. Increased reliability is the key performance indicator for us. Reliability may not be the main objective for everyone on the market, but it is a key idea in Russia today, especially in the industrial and energy sectors.

The Russian Ministry of Energy has approved your investment program for 2013-2017. What will be the main focus of this program?
Currently, Russia’s energy sector faces three critical tasks: establishing fair tariffs, enabling access to the grid infrastructure, and ensuring that the development of national grid infrastructure outpaces economic growth as a whole.
These tasks are partially contradictory and cannot be resolved simultaneously. Last year the Russian government has decided that the top priority should be on limiting tariff growth. Based on our current calculations, we had to decrease the investment program from 200 billion rubles to 150 billion rubles annually. In other words, the component of the investment program financed by tariffs has been reduced.
This does not mean though that our investments will be limited to this amount. We have to strive to maintain the investment program of Federal Grid at 200 billion rubles. Today, we are looking at other sources of funding that are not connected to tariffs. These include additional government funding, federal target programs, private investments and infrastructure bonds.
There is a solid cast for the 200 billion figure. In 2009, Federal Grid’s investment program stood at approximately 100 billion rubles, which did not allow us to ensure sufficient access to the electric grids and to stay ahead of economic growth. In 2011, we invested 190 billion rubles and commissioned 2,963 km of transmission lines and 18,502 MVA of transformer capacity at substations. I believe we should maintain this level because it ensures full utilization of capacities of the energy sector and allows us to solve the tasks set before us by the government and our consumers. We have developed a number of projects to achieve these goals. For example, we plan to commission 15,000 km of transmission lines and over 31 GVA transformer capacity in 2012-2014. In addition, new facilities for the manufacturing of state-of-the-art electrical equipment are currently being built in Russia with our support.
Our work has another vital component which shouldn’t be neglected. This is the modernization and upgrade of the existing assets. Today, the wear and tear of our equipment is 50%, which in fact, compared to the rest of the world, could be worse. However, in the past few years, many emergency backup power facilities and transmission lines have been built in other countries. Unfortunately, we still don’t have sufficient backup facilities in Russia. Therefore, a major task for Federal Grid’s team is to increase the share of investments into modernization from the current 35 percent to 50 percent. This will enable us to renew almost 3,000 kilometers of transmission lines and approximately 20 high-voltage substations per year.

You mentioned that the decision to create FGC of UES was a success. Just recently, President Putin signed the decree on creating a new company, Russian Grids, which would consolidate the management of Federal Grid and IDGC Holding. Might this give cause for alarm in the investment community? Are you sure that this is a positive development?
In fairness, it is hard to consider the creation of IDGC Holding an outright success, as it was with Federal Grid. In my view, the main problem here is that IDGC failed to implement an effective system of corporate governance, and to put in place the necessary systems to enable the core management principles to be implemented in practice in regional subsidiaries.
Federal Grid pursues a single technology policy; it has a centralized dispatch control center and uniform standards for the whole backbone grid system. Unlike Federal Grid, IDGC Holding has different approaches and policies, which causes an array of problems. First and foremost, this affects technological matters and tariffs.
Today, the power line leading from generation facilities to the end consumer is divided into three parts: Federal Grid backbone grids, IDGC distribution grids, and city grids. The management policies of these three entities are very different.
If unified standards and policies had been developed during the reorganization of the energy sector, we might not have to deal with such disunity today. Currently, there are almost 100 distribution grid companies and approximately 6,000 city grids in Russia, and they are not required to adhere to the same technological standards. We could have prevented many of today’s problems, if unified standards for the electric grid system had been established from the beginniong.
Today, reliability has become a key question for the whole network: from power generation to transmission and distribution. With three different participants in the system, however, reliability levels are insufficient. Under the current conditions, we can experience significant power losses through the transmission process. Of course, achieving the completely synchronized development of the electric grid system as a whole is extremely difficult. For example, Federal Grid may build a facility, but IDGC might not be ready for that yet, or vice versa. In the long run, this affects the efficiency and investment attractiveness of the companies as well as their overall performance.
These are some of the key reasons, which contributed to the Russian government’s decision to create “Russian Grids.” Whereas discussions on the development strategy of this company are still ongoing, I see this entity as a sort of quasi-regulator. The company should take on certain functions that affect the whole grid system and that are currently performed by each company individually. This concerns, above all, the development of modernization programs and smart grid programs, grid synchronization, personnel training and R&D. It should also be possible to transfer to this newly created management company some functions that are performed by government agencies. For instance, the Federal Tariff Service could allocate part of tariff to grids, and the management company could independently distribute these funds between market participants.
I believe the Russian Grids company could not only manage the grid companies as their shareholder, but it should also promote the development and operation of the electric grid system as a whole, including independent grid companies.
It might also be worth delegating to the management company certain powers for industrial oversight in the electric grid sector.
I believe this arrangement will work well. In the long run, this will help Russian Grids to be more than just a shareholder. But this is my personal opinion. Discussions on these issues are still ongoing.

On numerous occasions – such as at a round table at the St. Petersburg International Economic Forum (SPIEF) held last year – you have talked about grid consolidation and integration. Today, Russia exports electricity to Lithuania, Finland, and China. Going forward, what will be the economic significance of:
1. Further integrating Russia within these foreign grids and,
2. Consolidating the electric grid on the Russian territory through such initiatives as the West-East Bridge?
Today, we are working very closely with our neighboring countries. Often, our cooperation comes from our shared Soviet heritage; today, many of the transmission lines that were built in those times are used for the import and export of electricity. Today, we cooperate with the Finnish grids both in the export and import of electric power through our very reliable partner INTER RAO UES. These transmission lines are extremely important to Federal Grid and serve as a source of emergency backup power supply. Whenever there are problems with power supply in one of these countries, we help each other out.
To further develop the electric gird, we are currently focused on two strategic areas: consolidation and international integration. Without consolidation, there can be no integration; these two areas need to be developed in parallel. This was discussed at the APEC Summit, where the President of the Russian Federation set before us a very important task of uniting Siberia and the Far East of Russia. We are building on these efforts through the construction of DC lines at the Mogocha and Khani substations. In the future, integration of the power systems of Siberia and the Far East will make it possible to synchronize their development.
There are a number of other areas where we are working intensively in Russia. We have built 220 kV transmission lines up to the Vankor Field of Rosneft. In the future, we will further integrate the areas around Krasnoyarsk, Yakutsk and Vostok by creating a mesh circuit. The Kamchatka Peninsula operates its own energy system which we could integrate into the unified system depending on the economic needs. The first question that needs to be answered in this regard is whether we are planning on large-scale development of the economy in this region.
As for international integration, we are not only concerned about electric power sales, but also about emergency backup power supply. Today, we have 17 large lines connecting us with our neighbors. Our Chinese colleagues are investing a lot of efforts into building 1115 kV ultra-high voltage (UHV) transmission lines. As for Russia, currently, we supply electric power through 750 kV transmission lines. The experience of our Chinese colleagues shows that operation of such ultra-high voltage transmission lines and DC lines is vital to delivering power over long distances since it decreases electric power losses in the grids.
So, what are we discussing with our Chinese partners, what are we trying to achieve, and what are we proposing to the Europeans? Currently, we are discussing the development project for the West-East power bridge that can connect us with Europe. Russia’s generation capacity secures our position on the (free) electric power market. This is a major international project reaching beyond regional boundaries and aimed at creating a unified power system. It can be rightfully named “the project of the future.” We have to create a consortium with all key stakeholders and with the participation of private companies to provide them with the opportunity to be part of this market.

On a final and more personal note, you have an interesting biography showing both a track record in the industry and in politics. What made you switch from government service to industry?
Every year of my career has been fulfilling and exciting. I look back on the years that I worked at Norilsk Nickel with joy. When I joined that company, it was still government-owned. I was deputy general director when it became private. And even though private investors are very cautious, they put trust in me and wanted me to stay with the company. To me that was a valuable experience and the opportunity to see both government and private sectors at work. To be honest, I love working in industry. When I subsequently held various management positions at the government bodies of Norilsk and Taimyr, they felt like industry positions, except that they were related to production of government services. It is very important for people to feel that the government services they receive are of a high quality. “Production” of such services implies great responsibility.
Today, I am heading a company that is both public and private, which, perhaps, could seem like a paradox. This is very good training for me. We have a great team of professionals striving to achieve daily results. This is the only way we can successfully complete all our endeavors in the electric power sector.
Everywhere in the world –and particularly in Russia– there has been significant progress over the past 20 years. Our generation is living through times of considerable change. This might be difficult, but this is, without a doubt, necessary. It can be more difficult for the older generation to find a place in this new system but it is essential to adapt to the new conditions in order to achieve excellent results every day.
I am convinced that the Russian Grids is the right way to go. Now, we must create a new structure that will not only implement a single technological policy but will meet the needs of the market and society as well. When I used to speak of reliability, no one really understood its importance. As soon as I explained to our shareholders that pursuing a higher reliability level could yield lower dividends today but higher dividends tomorrow, the goal became clear. Today, everyone talks about reliability, and we regularly update our shareholders and partners. I can say the same thing about the development of high voltage smart grids: not long ago this topic was addressed merely in technical terms. Today it is starting to become a reality.

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