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Interview

with Vladimir Shkatov, Deputy Chairman of the Board, Deputy Chairman of the Board

07.03.2013 / Energyboardroom

As an introduction to the NP Market Council in Russia, how would you describe its role within the country’s power sector?

Whereas Russia may count many self-regulatory organisations in niches such as technology and finance, but organisations such as the NP Market Council are still a relatively new appearance in the country. The Council came forth out of a common desire of the power industry’s stakeholders to create a platform for producers, consumers, as well as government, political and financial organizations. It took a few years for the NP Market Council to become the organization that everybody wanted it to be.

Further to that, the Market Council has been allocated functions that do not entirely belong to a self-regulatory organisation. Monitoring price situations on the wholesale and retail market and providing forecasts on the sector are examples of this role. Basically, the Council’s approach is shifting from a compromising side to a more practical one.

The NP Market Council also evaluates investment projects in the nuclear and hydro sector. By doing so, we acquired in-depth knowledge that provides us the opportunity to evaluate projects in different sectors.

Our main goal is to take part in the elaboration of wholesale and retail electricity and capacity market rules. We develop and approve the Wholesale Market Trading System Accession Contract and Wholesale Market Regulations.

To sum up, the Market Council was established in accordance with the federal law while all wholesale participants are obliged to become members of the partnership in accordance with the law. We aim to unite –on a membership basis– electricity (capacity) sellers and buyers that are wholesale market entities taking part in the circulation of electric power on the wholesale market in order to create a positive investment climate.

The Russian Energy Strategy forecasts a need for 577-888 billion dollars of capital investments in the period to 2030 to expand and modernize the system. How healthy is the current balance between these capital expenditure plans and the electricity tariff structure in the sector?

Power structures constructed in the fifties are nearing the end of their life cycle today, whereas an increasing number of power plants and -infrastructure is now becoming obsolete.

Those countries that developed their power industries at a later stage –such as Brazil, South Korea and India– have the advantage that their industry is young and in a healthy condition. The “older” countries –such as the US, Europe and Russia— however, have been the frontrunners in technology historically, yet now find their power landscape out-dated. This is where governments have to find a solution.

Now, we can achieve modernization in two ways: renew old technology or find new technologies. Renewing old technology is a time consuming and potentially capital-intensive process that will still result in the lagging behind vis-à-vis other countries. New technologies, however, will allow us to move forward.

China has the advantage that they are building from scratch and absorbing such new technologies. It would therefore not surprise me, for instance, that China will become a world leader in terms of power technologies.

As for Russia, in my opinion we can make sensible investments to create reliable and functioning infrastructure from what we already have. This would be a valid alternative at least until the US, Europe and Russia are on similar energy platforms.

We have to take into account that it is not just Russia’s power sector that needs modernization: oil and gas, railways, etc. were all built at the same time. To rebuild our entire industry would require an amount of money that humankind does not have today. Consequently, determining the amount of investment needed will depend on the decisions that are now being taken at the government level.

Another topic worth touching on are disputes in Russia’s wholesale electricity market. What mechanisms exactly exist whenever a dispute arises between these different players on the market?

We have different mechanisms on the market, including the Committee for Disputes, a disciplinary committee and –as a last resort– the courts. It is generally a long process for participants to find a compromise. Participants take part in the regulation process regarding the wholesale market. What we aim to create is a system of compromises and balance. In order to create a balanced system, there is a monitoring commission consisting of representatives from government as well as legislative organs. One will thus find representatives from the Duma, Deputy Ministers, representatives of the Federal Tariff Service, the Minister of Energy, and the Federal Anti-Monopoly Service.

Going forward, how do you see the wholesale and retail markets developing?

The market strategy was put in place as a mechanism to attract investment for modernization. This task –in theory– has been achieved. Today, we are building power stations and improving our network. We have not solved all the problems but positive results are definitely showing.

The question remains how much of the future investments will be taken on by the government, and how much will be spent on other sectors such as infrastructure. Today, the power sector accounts for 2.5% of Russia’s GDP, which is not too much of a heavy load for the country. Using this money in the right way is the most impending question for the government.

Due to the current state of the financial markets, access to funding will significantly decrease further. Consequently, the government will not be able to find money to invest in modernization, resulting in a higher need for stricter regulatory measures.

In many sectors of our economy we are searching for economic efficiencies. Today, this is a priority on the agenda and will become the basis for modernization. Going forward, the power sector must find an efficient way to spend its funds. In today’s world we are not sure of anything, but what I am sure of is that in Russia everybody aims to find a way to for the market to be efficient

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