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Russia Power Report Q1 2014 - New Study Released

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2013-12-27 07:48:48 - New Energy research report from Business Monitor International is now available from Fast Market Research

With Russia's broader economy stalling, a slowdown in household consumption and structural impediments to broader growth and investment are likely to have a deleterious impact on the country's power sector - with power demand highly correlated with economic development and industrial production. As such, we continue to anticipate only moderate growth as macroeconomic headwinds and a shrinking population sap power demand, while structural risks such as the opaque business environment and weak institutional capacity continue to deter significant foreign investment in the sector.

Our relatively subdued outlook for the Russian power market is underpinned by a revision to our macroeconomic forecasts this quarter. In October 2013, BMI's Country Risk team once again downgraded their already-below-consensus outlook for the Russian economy based

on a sharp slowdown in economic activity over 2013. Furthermore, we believe the slowdown is structural rather than cyclical and, as a consequence (unless structural reforms are implemented), economic growth is likely to remain subdued over our forecast period to 2022. To this end, household consumption, which is the main driver of growth, is set to slow due to slowing income growth, slowing credit growth and elevated inflation.

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Making matters worse, we also believe that the diminishing windfalls from rising oil and energy prices will reveal the structural impediments to investment, such as corruption, grossly inefficient bureaucracy, inadequate property rights and questionable autonomy of the judiciary. With this in mind, and taking into account that power demand in Russia is highly correlated with economic development and industrial production, we have also revised our power forecasts to reflect the impact of these strengthening economic headwinds heading into 2014. We now expect electricity generation to increase at an average annual growth rate of 1.47 % between 2013 and 2022, with the country generating 1,164TWh by the end of our 10-year forecast period. Notably, falling demand could also weigh on much needed investment in modernising and substituting aging and inefficient thermal and nuclear capacity, and improving the country's inadequate transmission infrastructure.

Although Russia's current 'Energy Strategy 2030' outlines plans for the expansion of the nuclear and non-hydropower renewable industries, we remain cautious based on delays to the construction of nuclear installations and the slow development of the renewables segment. As such, although the outlook for renewables is improving, with Russia successfully closing its first renewables auction, we maintain the view that the country's heavy reliance on thermal energy sources, particularly gas, will continue into the next decade.

Among the key trends and developments observed in the market, we also highlight that:

* With oil revenues falling, state-run companies rather than the government will likely have to support any capital expenditure and investment in new capacity, as the Kremlin attempts to improve its balance sheet. However, complicating matters, we note that in September 2013 the Russian government proposed freezing electricity tariff growth - in an effort to tame inflation and enable the Central Bank to cut rates. This is a move that will weigh heavily on utilities' profits and revenues and it could be particularly problematic for the financial health of state-owned utilities. These companies may be caught in the position of having to pick up any slack in power sector investment (as an extension of the state), even at a time when the tariff growth freeze is affecting their profitability.
* To this end, Economy Minister Alexei Ulyukayev was quoted in September 2013 as saying that gas and electricity rates, which are normally raised in July, would not be raised until July 2015 - and then only at the level of inflation in 2014. Taking things a step further, Prime Minister Dmitry Medvedev is also reported to have told ministers to draw up a new economic development plan for 2014-2016 that would incorporate a scenario whereby tariffs are maintained at 2013 levels - a directive that is reportedly 'being considered'.
* Nevertheless, state-owned monopoly Gazprom is focusing on investment in its domestic market, with a number of high-priority power generating projects currently under construction. These include a new 660MW coal-fired generating unit at the Troitsk SDPS and gas-fired generating units with the aggregate capacity of 1,060MW at CHPP-12, CHPP-16 and CHPP-20 in Moscow.
* RusHydro is also in the process of adding 8GW of new capacity and Russia's biggest hydropower station, the Sayano Shushenskaya plant, is reportedly advancing following the violent breaking apart of turbine two in a tragic accident that killed 75 people in 2009. Of the 8GW of capacity to be added, most will result from repair and refurbishment of 10 turbines at Sayano Shushenskaya, bringing it back to its maximum capacity of 6.4GW. During a meeting in late-July 2013, Yevgeny Dod, the head of Rushydro, assured President Vladimir Putin that the whole facility would be operational by end-2014.
* Similarly, nine units at the 3000MW Boguchany Hydropower Project (HPP) are under construction - with RusHydro planning to commission the entire facility by end-2013.
* Finnish Utility Fortum is proceeding with work at its Nyagan power plant in Western Siberia - Fortum's largest investment in Russia. Once completed, the power plant will have three 418MW units. The first unit was commissioned on April 1 2013, the second was undergoing the final stages of testing as of October 2013, and the last unit should be operational by end-2014.

About Business Monitor International

Business Monitor International (BMI) offers a comprehensive range of products and services designed to help senior executives, analysts and researchers assess and better manage operating risks, and exploit business opportunities, across 175 markets. BMI offers three main areas of expertise: Country Risk BMI's country risk and macroeconomic forecast portfolio includes weekly financial market reports, monthly regional Monitors, and in-depth quarterly Business Forecast Reports. Industry Analysis BMI covers a total of 17 industry verticals through a portfolio of services, including in-depth quarterly Country Forecast Reports. View more research from Business Monitor International at

About Fast Market Research

Fast Market Research is an online aggregator and distributor of market research and business information. We represent the world's top research publishers and analysts and provide quick and easy access to the best competitive intelligence available.

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Bill Thompson
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