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Interview

with Vladimir Babyak, General Director, Intertechelectro

19.09.2012 / Energyboardroom

The government of the Russian Federation has recently outlined its Energy Strategy 2030, where the Russian power sector was described as outdated in terms of infrastructure, highlighting the need for modernization. You, in turn, have seen this sector evolving since 1987. What do you believe is the current state of Russia’s power facilities?

Russia has many power plants that are rather old. For example, there is a power plant that was built in 1944 and practically run out of his lifecycle—it will probably run for a couple more years but that will be the end.

The Ministry of Energy therefore approved a program last July to provide for the decommissioning of the oldest plants. These plants will no longer participate in the commercial power production, meaning that the market will no longer be able to purchase power generated by such facilities.

Two sources of income exist for power generation companies in Russia: power capacity and actual power sales. Even if a power facility is not in operation, the government will thus pay for keeping the generation facility available. The actual electric power provided is being paid for subsequently. For outdated power plants, however, the state will not pay for keeping such capacity available. For generation facilities that need to live off power sales alone, the situation becomes unprofitable.

Another group of power plants –built during the Soviet era– are still profitable and able to operate for a long time. These plants have rather high fuel consumption and -costs. Only a significant increase in the cost of fuel can stop them from continuing their operations. According to our own calculations, building modern Combined Cycle Power Plant (CCPP) requires high capital investment today, but becomes more profitable than older plants in the long run. This is because the efficiency of a new CCPP will eventually balance out investment costs and pay back through so-called long-term capacity agreements. At the same time, however, a new CCPP today will only generate more profit than older plants if the cost of fuel would go up two and a half times more than now. Thus, once the Russian fuel costs reach European levels it will be more profitable to build new power plants and decommission the old ones.

For our company, the dilemma persists in the fact that we have our own generation plants—CHP-1 in Kurgan (built in the sixties) and a CCPP in Noyabrsk. The old CHP at the current cost of fuel will remain profitable and it is not beneficial to invest in modernization.

Andrey Klimenko, EPC Director of EM Alliance stated that EPC contracting is usual for the leading foreign companies while this kind of construction is new for Russian companies. Looking at Intertechelectro’s efforts in the EPC and EPCM segment, how do you see the company’s chances vis-à-vis foreign competition?

Till 2007 – 2008, power plants were still being built by the generation companies themselves, through subcontractor models. The last power plant constructed following this method was built near Nizhny Novgorod. Such construction model, however, does not provide clear timelines while shareholders can also not be held responsible for potential delays.

Russian as well as foreign EPC and EPCM companies face two problems in Russia. First of all, they may only participate tenders on the condition that will include delivery of the main equipment. As a rule, generation companies in Russia select the equipment before announcing the tender for the actual engineering process.

Second of all, technical supervision and technical regulations remain very strict and bureaucratic in Russia. Russian technical regulations are not only stringent; they are very complex. With regard to the construction of power plants, foreign companies eventually have to address Russian partners to submit documentation in order to receive the necessary approvals or permits. Consequently, we operate with a number of foreign partners, each claiming that without the participation –or input– of a Russian company they would never be able to succeed.

In February 2012, Intertechelectro and IES-Holding signed a general contract for the Kirov HPP-3 capital improvement. The Kirov HPP-3 has been the largest generation project in the Kirov region over the past decades, said to boost regional development. Has this been a milestone in your experience?

In recent years, Intertechelectro has commissioned quite a few power generation units. In 2010 and 2011 we commissioned two units at the Noyabrsk power plant—the most northern power plant of the Russian Federation. Moreover, we also commissioned seven power generating units at Priobskaya for Rosneft and a power generation plant for Fortum, the CHP-3. At present, we are commissioning two more power generating units too. There was a period that there were six construction projects on track simultaneously, a rather challenging time for us.

Nonetheless, the Kirov HPP-3 is still a milestone for Intertechelectro. Our efforts in the past have been recognized by our customers and new projects are lining up.

How healthy is the current pipeline with regards to the company’s growth?

The advantage of our current projects is that they are all at different stages. Intertechelectro finds it difficult to start two projects simultaneously. We are not such a big company and still less experienced than Western companies.

Today, we pursue the implementation of our current projects and simultaneously actively participate in tenders. At present, we are ready for another contract that would allow us to move on to a subsequent project. Once the Kurgan plant has been commissioned, we hope to have a new project lined up.

What type of projects are you now aiming to add on to this list?

We have our dreams as contractors but the reality dictates that the customer determines the type of contract.

The first power plant Intertechelectro built were two generating power units of 62 MW each in Noyabrsk. Subsequently, we commissioned power generating units with a 110 MW capacity and a power unit of 230 MW. Consequently, it would be interesting either to commission larger power generation units or move into coal fired power plants. Moreover, we would be interested to conduct a project in cooperation with a western engineering company. This would provide us with the opportunity to share knowledge.

Are there projects that are still too big to handle for Intertechelectro?

I believe that customers would not yet offer us a 800 MW project, which require a proven track record. However, it would be interesting for us to participate in such a large project together with other partners in order to increase our knowledge and experience on this front.

Are you also looking for projects abroad then?

In Europe the market is saturated with engineering companies that understand the different European technical regulations very well. There are markets, however, in developing countries where we are making certain efforts. Our employees have participated in construction projects in Northern Africa and the Middle East. Our Russian engineers and experts enjoy a good reputation there, while technical requirements are also less strict than in Europe. Thus, we believe there are chances for us to participate in projects in the future there, even though our main focus remains the Russian market.

Intertechelectro has created a joint-venture with SoWiTec—one of the leaders in wind power generation– in order to build a wind power facility of 50 MW in the Kurgan region. This should be one of the first projects of its kind in Russia. So far, the country has shown limited interest in these types of projects. Do you believe that such projects will take off?

SoWiTec is a realistic and experience company, fully aware that current Russian regulations preclude the construction of such a wind park today. Our primary goal, however, is to develop a complete design together. As soon as the requisite regulations are in drafted, approved and implemented, we can immediately start with the construction.

You have been awarded with a certificate of honour of the Kurgan region administration for majorly contributing to the development of municipal energy of the Kurgan region. Where do you see yourself taking the company in this region within five years?

We have a good partner relation with the administration of the Kurgan region, which is not a wealthy region, but rather an agricultural area.

CHP-2 for example is a EUR 350 million investment. Such significant investments create jobs and bring taxes to the region. Today, the Kurgan region produces 300 MW –yet consumes 800 MW– of energy. With the commissioning of new power plants, we have considered the development of the wind park too. It can become a true ‘energy province.’

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