Yevgeny Fyodorov. This market has no mystery for us.

Original: Expert-Siberia

Author: Mikhail Kichanov

Irkutskenergo, JSC is a magnificent industrial complex, located in the territory of Irkutsk Oblast and Krasnoyarsk Krai. Today, 40.007% of the shares are held by the Inter RAO UES, and 50.19% - by EuroSibEnergo, Russia's largest private energy company (owned by En + Group of Oleg Deripaska).

For a long time, Irkutskenergo has been developing as a Power Coal Company, although electricity is its main "product", produced at three hydroelectric power plants of the Angara cascade, Bratsk, Ust-Ilimsk and Irkutsk ones. Today, Irkutskenergo attracts special attention due to its activity in the various, far from the power and heat production fields.

The company’s subsidiaries are involved in the construction of low-rise settlements, residential fund and water utilities management, telecommunication and industrial facilities construction etc.

But, according to Yevgeny Fyodorov, Irkutskenergo, JSC and EuroSibEnergo, JSC General Director, being interviewed by Expert-Siberia, these activities are joint parts of one and the same logical chain. As a result, an energy company, being theoretically a service one, is becoming a powerful engine of development of not only infrastructure but also the real sector of the whole Eastern Siberia.

- Yevgeny Vladimirovich, what are the main peculiarities of Irkutskenergo operaring during 2012?

- The Company business plan had been implemented in full by the end of 2012. Comparing with 2011, there was some decrease due to the tightening of the regulatory framework, as well as a number of limits for payment for hydroelectric power plants capacity. These factors have had a major impact on the industry. At the same time, we ascertain high prices prevailing at the market in the second price zone.

And, that price rise was developing much faster than the rate in the first price zone. Mainly, it happened due to lower water content in the region, if to compare with 2011. The Irkutskenergo plants’ production output per plant in 2012 is comparable to output-2011, but Krasnoyarsk and Sayano-Shushenskaya hydroelectric power plants’ output decreased dramatically.

The Krasnoyarsk hydroelectric power plant (part of EuroSibEnergo - Ed.) experienced the most complicated situation. Last year, 14 billion kWh were produced there; against∙ 18 billion kWh in previous year and 23 billion kWh in 2010. We expect that production is unlikely to exceed 15 billion kWh due to low water content in 2013.

- Doesn’t the nature help you?

- No, natural factors are the most serious reasons. Frosty December 2012 and January 2013 caused the sharp increase of power consumption and high free power market prices. There aren’t any power supply agreements (PSA) in Irkutskenergo. What investments refund instruments do you apply to the new thermal and hydroelectric power plants construction projects?

- Actually, we have no PSA. Consequently, the volume of investment into the industry is slightly lower than that one of other companies. Any other large-scale instrument, but PSA has not been created in terms of refund.

In addition, Irkutsk Oblast is redundant for electricity. In my opinion, there is no need to start a new large-scale PSA project due to some definite objective reasons. No significant growth in demand for electricity is expected in Siberia till 2020-2025.

Quite a lot of capacity has been put into operation recently; moreover, consumption is growing at a different pace as it was predicted by the approved PSA programmes. Power consumption fluctuation has been about one percent for some last years.

- And is Irkutsk Oblast highly redundant for electricity?

- A philosophical question, taking in consideration that we are speaking about a unified energy system. Irkutsk Oblast is closely connected with the Krasnoyarsk Krai along the 500 kV power lines, with Buryatia and Transbaikalia – along the 220 kV ones. If you look at the situation formally, about 60 billion kilowatt- hour are produced in Irkutsk Oblast, and only 50-55 billion kWh are consumed by the territory. One could name 5-10 billion kWh a kind of superfluity. But being considered from the point of view of power supply of Siberia, the situation is slightly different.

- Is there a danger that currently implemented in Siberia projects will lead to the overproduction of electric power?

- Due to PSA, that is to be realized by the end of 2017, the supply and demand situation at the market will be balanced. For a number of regions, it will be even redundant. And it is true for Siberia, particularly in 2014-2015, in connection with the putting into operation Boguchanskaya hydroelectric power plant, projected startup of a unit at Berezovskaya hydroelectric power plant (800 MW), the commissioning of new capacity at Gusinoozersk hydroelectric power plant. All together creates a local surplus.

- Does it mean that the investments in the construction of new generating capacities are not necessary at all?

Certainly, not. There are at least four points on the map of Russia, where the construction of power facilities is urgent. They are Tuva, Bodaibo, Novorossiysk and Chechnya. In these areas, according to the Ministry of Energy of the Russian Federation, on the threshold of 2015-2016 years, a stable power deficit will be formed, that is why there is a need for the construction of generation. But the volume is not the same as created in the PSA frames. In these four energy nodes, there are a lot of much more efficient and transparent ways to invest than the PSA. There should be a competitive system where the winner is the one who is willing to sell the power at a low price. -Is the government ready to stimulate the construction of new generating capacities after the end of the current term of the PSA?

- I do not consider it appropriate to introduce any special incentives (except in special cases, which we have just discussed). To create a new long-term model, which will produce these price signals itself, seems to be more correct. It is obvious Bodaibo is the first «growth point" and the most interesting for you among the stated above. What is the situation with the construction project of the Ust-Kut thermal power plant?

- We have completed the first stage of the design, received the site and agreed on the possibility of this construction with the region and municipal authorities. Now we are waiting for decisions related to the construction of the power output circuit, which must be made by the Federal Grid Company.

It is necessary to construct a transmission line to Chara to make the project real to its end-users. There is the Udokan copper deposit and other deposits along the BAM. Construction of the plant could solve the problem of energy shortage in Bodaybo. But at present we do not have agreements with consumers. And they cannot be concluded, because the power line does not reach them. We are consulting with the Irkutsk Oblast Government which supports the project as it will provide the necessary level of infrastructure.

- How did you manage to make the plant the main supplier of electricity to new mining projects in Transbaikalia?

- Well, we have not succeeded yet. It seems to us that we perceive the economy of our potential customers in the right way, to be supplied by us will be more efficient for them. It is necessary to construct a power transmission line to make it physically possible. And after that, the logic of the economic process will force us to negotiate. There are all economic conditions for that.

- What are the time frames to construct this thermal power plant?

- We can start construction in 2014. This year, we have provided funds to continue designing by the business plan. Depending on what kind of infrastructure solutions will be made by the state, the project will either speed up or just implemented. We are thinking of the next year start of construction.

- What will be the plant capacity?

- The total capacity will be up to 1,200 MW, the first unit - 400 MW. One has to understand that the BAM itself, as the railway, is also experiencing a serious shortage of electric power. The Government plans to increase the capacity of the BAM will require additional power. To date, the shortage of electric power at the BAM is estimated as much as 50 MW. It is already leading to a decrease in the quality of power supply in the villages along the railway and reducing the possibility of the railway to carry heavy cargo transportation. The situation will only be getting worse. Any increase in traffic through the BAM is impossible without solving electric power supply problem.

- Why was the license for Kupsky deposit purchased? Are you planning to make Irkutskenergo the energy-coal-gas company in the future?

- It is a local project. We believe that in the medium term, this area may be of interest from the point of view of future gas supply of Ust-Kut thermal power plant. The project is long. The production will probably start in seven to ten years. But we are not going to develop the gas business. For us, it's just a resource. Under the license, we will conduct further investigations of the deposit, seismic survey, drilling of exploratory wells, and so on. We understand that this area can be very useful to us strategically in the long term.

- That is, will the investment be insignificant in the coming years?

- Yes, relatively small. It is clear that the seismic survey is not cheap. But we are not planning any billions of investment in the near future.

- What about the joint with Chinese partners projects to construct new hydroelectric power plants in Siberia?

- At the moment we are developing a declaration of intent for the Nizhne-Angara hydropower plant in the Krasnoyarsk Krai. The draft document is being done by ourselves as we realize that the Chinese partners’ interest is really great. Hopefully, by the end of the summer, the declaration will have been developed, and by the end of the year, signed. After that, we will start the design. Construction of a power plant is much more complicated and long- time project if to compare with the thermal generation. There are certain steps, including environmental studies that must be done.

- What is the estimated aspect ratio in the partnership?

- 50 to 50. A joint enterprise has been created to become the main holder of the projects. At present, we are working out a project on Nizhne-Angara hydrogenation. All the other potential projects are analyzed from the point of view of practicality.

- Commonly speaking, what do you think of China being interested in such a project?

- It’s positive. In my view, this interest cannot be called Chinese expansion. Chinese money is now the biggest, fastest and cheapest in the world, and not to use it for Russia seems to me wrong in the situation of shortage of investment resources inside the country.

- Why is the company engaged actively in the creation of non-core assets? Why have residential construction, metallurgy and communication been selected as the key areas?

- All of the mentioned areas of industry have some kind of synergy with the energetics, that’s why we are interested in them. For example, housing construction is one of our biggest investment projects, though it can be thought something beyond the energetics sector. But the efficiency of this business depends not only on how quickly and effectively you construct buildings, but on technical solutions you offer in terms of engineering infrastructure, water supply, sewerage, heating and electricity. The efficiency of these solutions makes it possible to speak of success of the overall project. We have all necessary competencies to develop construction projects much better than any of Irkutsk Oblast developers. Counting on the engineering infrastructure, I am far from rejecting the requirement that housing should be built efficiently, quickly and at minimal cost.

- At what stage is the construction project? What kind of project will it be?

- We are planning to build 430,000 square meters of low-rise housing. They are townhouses, cottages, duplexes and three-story houses. Development will provide housing for up to 17.5 million people. The project will last for 10 years, the total investment in the building, transport and engineering infrastructure will be about 22-25 billion rubles. Construction will take place near the village of Pivovarikha, Goloustnensky highway, and at three sites at the Baikal highway, on the way from Irkutsk to Listvyanka. The two sites are located near the city, six to eight kilometers away, one is a little further away - 14 kilometers, and the last one is 28 kilometers away from the Irkutsk border. The construction permit has been already received. Taking into consideration the fact that the Baikal highway is a fully functional road, we hope, the project will be interesting not only for people who want to buy a second home, but also for those who will buy it as the only residential real estate. Travel time from Irkutsk to the house will be about 15-20 minutes.

- Will the class rate of the objects be different?

- Yes. We purchased sites from the government at a public auction, which was conducted by the Federal Fund for Housing Development and specifically organized to stimulate housing construction. We have a commitment to build a certain number of economy-class housing on three sites. But on one of the sites only business-class housing will be constructed. We are planning to enter the site until the end of the second quarter. We believe the first 45,000 square meters will be completed by October 2014.

- What is the percentage of the economy-class housing?

- More than 50%. Social facilities such as kindergartens, schools and hospitals are designed at each of the sites. It's no secret that Irkutsk Oblast is one of the most expensive regions in terms of cost per square meter. It is more expensive than in Krasnoyarsk and Novosibirsk. It is mainly due to the fact that the volume of constructed housing is not sufficient to meet the existing demand. I think that our construction project will slow down the speed of housing prices growth, and may even cause the housing prices decline in the region.

- Upon completion of the construction, will there be the own organization that manages the housing?

- Certainly. We will recommend tenants to choose a management company that will provide the highest level of service. Housing and communal services are not our business in the direct meaning of the word. That is, we are not to earn money. The aim is different - to ensure the transparency of cash flows. It is no secret that the money of supplying resources organizations are often, well, stuck at the management companies. We understand that the public pays for communal services to a management company, and the company spends this money on necessary, from its point of view, directions, but not for electricity, water and heat supply. That is why, we have chosen the cities where we have had the most serious problems with the payment discipline of management companies. They are Ust-Ilimsk and Usolie-Sibirskoye. We want to improve the performance of companies in the sphere of housing and communal services. By the end of 2014, it will have become clear how we manage to do it.

- And how did it happen that you decided to construct Irkutsk Data Centre?

- The Irkutskenergosvyaz company, one of the largest operators, providing Internet services, telephony and IP-TV in the region, became a separate legal entity long ago. For us, it is a strategic direction to support in any way expanding area of presence on the territory of Irkutsk Oblast. It is obvious that and the need for capacities to store information will increase with the growth of internetization. The whole world has centralizes the storage of information, building powerful data centers. These centers allow you to store data in a complex, providing fundamentally better data protection. A scale effect increases the profitability of this business. I can’t say it is a new topic for Russia. Data centers are being built by all major mobile operators, the European largest data center was built by Sberbank last year. But in Siberia, there is no significant data center. We, like many other things, supply this service through Moscow traffic. The idea is to catch locally communication channels here in Siberia. An important factor is that more than 50% of the Data Center cost structure is the electrical power. It is connected with cooling the servers. Refrigeration system is the most significant consumer of electrical power. The remaining Data Center operating costs are relatively small. Irkutsk Oblast is the only place in Russia with such a competitive cost of electricity, and in the world there are only few of them. For example, the cost of electric power in Irkutsk is three times lower than in Moscow. Therefore, on the one hand, it is a new direction of development of Irkutskenergosvyaz assets; on the other hand, it is the major electric power consumer. We think it is the proper direction for the development of the business, proved by international experience.

- What are its scales?

It will be the largest data center in Russia. The total area is 10,000 square meters. By the end of 2014, we hope to put into operation the first unit. We expect that the key Data Center customer will be banks, large companies and government agencies of Eastern Siberia. Investment in the project will amount to 2.5 billion rubles. Until the end of this June, we are planning to complete the preparation of project documentation.

- And how many construction stages will be there?

- Now we are trying to define the optimal volume of the first stage. It will depend on how quickly and by how much we agree with the "anchor" investors who would be willing to buy back a large part of the premises. From the point of view of relationships with the contractors, several options are being considered. They can be as follows: areas for rent, lease and rent servers, and exercise of all services related to the physical data storage. To sum up, so as we agree.

- Will the Data Center operate only for Irkutsk citizens?

- Not necessarily. It will be able to store information of the Siberian, and, for example, large Moscow companies. We think, the idea of e-government is interesting and promising. It is clear that a huge volume of data will need somewhere to be stored. To store data in one and the same place is cost-efficient.

- How fast do you think will this project be repaid? - We expect the payback period will not exceed seven years. We have all the capabilities to provide a wholly-owned filling (rent / sale) of the Data Center.

- What are the areas of Irkutskenergo interest in the water utilities management?

- We have managed the water utility in Ust-Ilimsk. In 2012, we entered into a long-term lease agreement in Sayanogorsk. And we are still considering several cities in Irkutsk Oblast. Hopefully, by the end of 2013, several agreements will be concluded. Motivation is very simple: 80% of the water supply and heat supply are in the “same tray” in Siberia. In our view, maintenance of water supply and heating systems by a single center has a number of advantages associated with the efficiency of the staff and the promptness of troubleshooting. It's no secret that if a well is hovering, the problem may be that of a heating network, and at a water treatment plant. If the heating systems team come to the accident and realizes that it's not their problem, they, in the best case, call the water utility. Managing everything from a central point has some advantages.

- Could you give an example...

- Consider Sayanogorsk. There is the Heating Networks Department of 70 people, with own emergency team and dispatch service. In parallel with them, there are 70 water utility employees who perform similar in many ways functions. There also are services that come to the elimination of emergency situations. Why to duplicate?

- Tell us, please, about the construction of electro steel plant in the Irkutsk region?

- This project is also linked to regional low electricity cost. It is evident, that it is the territory to build energy-intensive industries. Steelworks is a fairly simple production: collecting scrap, loading it in a special furnace, melting down and getting the metal. In fact, the cost consists of three components: scrap, which is enough in the region, electricity (up to 25-30% of the cost) and salary fund. Now all the scrap is collected and shipped away to two points, either Kuzbass Evraz Group plants or Amurmetal, the Far East. Counting the increasing cost of the rail transportation, the logistical costs are huge. Therefore, the construction of a steel plant is in our region will make the positive effect on traffic.The project will be implemented in one of Irkutsk Oblast southern towns near our power capacity, where we have already set up the necessary infrastructure: heating, electricity and water supply. In our opinion, it will provide major savings in capital costs. We estimate it to 30%. The main products of the plant will be the construction rebar, which is to be realized here. These factors will help to optimize logistics. Annual capacity is 260,000 tons of rebar.

- How long will the construction last?

- 18-20 months. Project work is to be completed by the end of this year and the site start up works – next year. We plan to put it in operation as a single phase in 2015. The size of investment is estimated as much as six billion rubles with a payback period of seven years.

- Let's talk about the market. Last February Russia experienced serious scandal at Energostream, which resulted in just six power sales companies of the holding, including Siberian ones, have been deprived of the status of a power supplier. What, in your opinion, is the cause of this phenomenon at the Russian electric power industry and whether it was possible to prevent such a situation in the power supply market of the country?

- The reason is very simple: the colleagues didn’t make ably payments to generators, but decided to withdraw that money from the company. It's probably was efficient until supply companies were more profitable and they could cover the cash gap, current and future earnings, and loans that were provided by banks under growing business. Here, unfortunately, two factors came together simultaneously. The first one is decline of profitability of the sales. It was a policy decision of the state. The second one a large-scale withdrawal of money from the company. Could the situation be brought to the stage? In my opinion, yes. It concludes activity of the Ministry of Energy, and law enforcement and regulatory authorities, and the regulatory framework, which seems to be created, but in fact it turned out that a number of decisions and orders of the government have not been issued yet. To my mind, the situation has not been over. First, the measure, taken when the status of a supplier in the Subject of the Federation was taken over by separate branches of the Interregional Distribution Grid Company, is a temporary one. Resolution of the Government obliges to hold a contest to choose a new guaranteeing supplier within a year. I hope all the necessary legal framework will be developed as soon as possible and the contests will take place this summer. And we are planning to participate for the status of the guaranteeing supplier. I would not like the situation to hang indefinitely. If there is a solution that networks and marketing must function separately, then you need to continue to follow this logic.


- How would you evaluate the current situation at the national power supply market and the activities of the Market Council on its regulation? - In my understanding, there were some elements of dashing aside. Certainly, the money, earned by sales companies in 2010-2011, was, so to say, irrational and not comparable with the functions to be carried out by sales. There was a certain excess return of these businesses operation. It is true. On the other hand, the decision to deprive the sales company the possibility to carry out their activities more or less efficiently is also not optimal. That debt, which was formed at even stable sales companies in 2012, began to trouble much. I respect the new method, which was adopted in December. On the one hand, it is balanced and does not generate excess return of sale, on the other hand, gives clear incentives to maximize the percentage of payment collection from retail customers. I hope, no other radical changes will be introduced for the sector at least in a medium term. Now the situation is in a balanced position.

- What is your forecast for power prices in Siberia till the end of the year and for a three-year term?

- Speaking of the year 2013, we distinguish two periods. First one is the initial four months of the year, when the electricity price will be kept at a high level. Last three months have confirmed it. Further, a serious decline in prices is most likely to happen. Maybe even lower than last year level. The main factors are Boguchanskaya HPP, putting into operation hydraulic units at the Sayano-Shushenskaya HPP and the lack of growth in demand for electricity. Then everything will depend on the water content of the Angara-Yenisei cascade. WE expect a serious decline in prices since May due to these equal to last year factors. 2014 will probably be even more difficult for the power engineers. I think, prices will be lower than the current year ones due to the higher production level of Boguchanskaya HPP. It is as much as 17 billion kWh, despite the fact that total consumption in Siberia is 200 billion kWh. In fact, the market is to receive additional 10% of the cheapest generation. Of course, it will put pressure on the price. Certainly, input of several major energy-intensive industries is expected, but it is still far from being able to compensate the additional power supply proposals that have come onto the market. And after that, with the appearance of new industrial customers, the situation at the market will level off and prices will return to the level of 2012.

- Besides Irkutskenergo, only one regional energy holding, Tatenergo, is the owner of distribution and transmission main power lines, you have been repeatedly offered to sell them, but you refuse. Why?

- Distribution main power line network does not belong to Irkustkenergo; it is an asset of Irkutsk Electronetwork Company (IESC). Irkutskenergo is one of the shareholders of IESC. Our co-working has a number of positive aspects associated with synchronization of schedules of repairs and construction. A simple thing, the imbalance of schedule of repair leads to the situation when the generators are forced to keep a large number of thermal power plants capacities in hot standby. Even here, where all the activities are synchronized, similar problems sometimes occur. The situation I watch in other Subjects of the Federation often looks absurd. To withdraw line for repair a month earlier or later allows the generator to save tens of millions rubles, but the network is repaired at convenient for the network company time. It is also true to capital construction. Taking into account the usual situation when the lines are constructed as long as hundreds of kilometers, investment resources should be refocused on generators that are able to build a facility right at the point of consumption. In our view, such co-work based on common corporate interests, is always more efficient than what we are having at the market right now.

- So, you are not going to sell your block of shares of IESC (Irkutsk Electronetwork Company), aren’t you?

- Absolutely not. The best proof for co-working is the current electricity prices for end users, it proves that the positive practice is more important that theoretical negative.

- What will be changed in the country, in your opinion, if Russian Network Company starts up and owns not only the distribution but also the bulk electrical power systems of Russia?

- I'm not sure there will be a major change. Certainly, there are solutions on how to optimize investment costs and personnel costs. I hope that the joint company activity would be more logical. Often, a conflict of interest between the Federal Grid Company and Interregional Distribution Grid Companies was of no use at all. I hope these drawbacks will be corrected in the case of management by a single center and the formation of a common goal-setting. Well, I expect that the privatization plans will be implemented at a number of regional grid companies. It is exactly right decision. Private companies are still more efficient. I believe that we have great potential to improve the performance of a number of power grid enterprises.

- You have repeatedly said that you could manage more efficiently the distribution network throughout Siberia, whether you have a chance. Yet, the government has not decided to privatize IDGC of Siberia, despite the ambiguity of the situation, which has been pursuing this state company for last years. Would you qualify for the purchase of IDGC of Siberia now, if this company is put up for sale as a result of the reorganization of the electric grid complex of Russia?

If the decision to sell IDGC of Siberia or some of its parts is accepted, we will definitely qualify for the purchase. In our view, we will be able to increase the reliability of the networks, ensuring the cost-effectiveness of their operating. Irkutsk Electronetwork Company is comparable to the IDGC of Siberia in scale. At this market, there are no mysteries and white spots.

- When do you expect such a decision?

- Decisions on the privatization of any IDGC may have been adopted by the end of the summer. In my view, there is an obvious desirability of privatization of IDGC of Siberia. There is a problem with the tariff decisions in Buryatia or Transbaikalia regions, as an example, with the growth rates that have been established in these markets, the problem of the last mile in the Krasnoyarsk Krai and a number of other Subjects of the Federation, Khakassia, for example. The State needs to determine the strategy: what is sold the first, what is the second. And the most important: how to sell. It is very important.

IrkutskEnergo Power Coal Company is a powerful industrial complex, located in the territory of two Siberian regions, Irkutsk Oblast and Krasnoyarsk Krai. It includes a cascade of three hydroelectric power plants ( Bratsk, Ust-Ilimsk and Irkutsk) built on the Angara River; nine thermal units in the cities of Irkutsk Oblast; six coal and lignite mines of VostSibUgol, Ltd.; two cargo transportation departments and a processing plant. The installed capacity of power plants is 12.9 GW, including more than 9 GW of hydro and 13,000 Gcalh of thermal power. Capacity and production volume grid can work out more than 70 billion kWh of electrical and up to 46 million Gcal of heat power. The VostSibUgol, Ltd. mines total production capacity is 14.9 million tons a year. Overall, within 12 months of 2012, Irkutskenergo hydroelectric power plants produce 60.9 billion kWh, what is 2.7% higher than results- 2011. The hydroelectric power plant generation amounted to 44.7 billion kWh (3.9% less than the previous year results). The thermal power plants generation accounted 16.2 billion kWh (26.4% increase). High dynamics of power generation by thermal power plants is explained by HPP low parameters. Heat production amounted to 23.7 million Gcal, which is comparable with 2011 level (two per cent increase).

May 17, 2013
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