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Today, more than half of electric power generated in Russia falls to power plants running on natural and associated petroleum gas. Accordingly, less than a half is generated by other plants: nuclear power, hydroelectric power, coal, residual fuel, diesel fuel, etc. Low gas prices that have been existing for a long time, contributed to driving out other fuel types both in the industry and power generation markets. As a result, a gas share in the country’s power consumption increased from 42.1 percent in 1990 to 51.2percent in 2006. The Russian economy is the most gas consuming economy in the world, leaving behind the U.S. and German economies. In the U.S., gas consumption is nearly six times less, and in Germany – eight times less. Alongside with external factors (severe climate in the most part of the country, huge distances and consequently heavy spending on transportation of energy resources), high gas consumption in Russia is also the result of use of obsolete technologies requiring high energy expenditures. In Russia, the efficiency of gas-operated thermal power plants (TPP) with steam turbines is 38 percent, whereas for combined-cycle plants (CCP) used all over the efficiency comes up to nearly 60 percent. Gas consumption in metallurgy, cement industry and a number of other industries is nearly twice higher than similar indices in foreign countries.

“The most efficient investor”

Due to relatively cheap “blue fuel” available in country, introduction of energy-saving technologies and new environmentally sound fuel types has become virtually noncompetitive. Unlike many industrially developed countries where gas is consumed primarily by population, in Russia it is used mostly by generating companies and industrial enterprises.
And it is a growing tendency supported to a great extent by the policy of Gazprom, the Russian gas giant, which continues to expand its presence in the Russian energy market. During shareholders meeting on June 27,2008, Chairman of Gazprom’s Board of Directors Alexei Miller stated: “Electric power industry is turning to be a core activity for Gazprom and enables to ensure a significant synergetic effect.  Renewal of generating capacities and upgrading their efficiency makes it possible to release significant gas volumes that are used in the Russian power generation sector with inadequate efficiency. From this standpoint, Gazprom is the most efficient investor in the Russian power industry.” The head of the gas holding mentioned by way of example the purchase of Mosenergo’s control stock by Gazprom, which was a starting point for the modernization program of the country’s largest thermal power company. He reminded that in autumn 2007, it enabled commissioning a combined-cycle power plant with a 450 MW capacity in TPP-27, which is the most advanced plant in Russia today. This year, a similar power plant has been commissioned in TPP-21. Total capacities to be commissioned by Mosenergo in 2008 will exceed 1,100 MW.
At present, the total installed capacity of Gazprom-controlled generating companies exceeds 35,000 MW; and by 2012, it will raise up to 45,000-46,000 MW with new capacities being commissioned as scheduled. According to the policy of expanding own power generating assets, Gazprom intends to increase its share in generating companies TGC-1, OGK-2 and OGK-6 to a control stock only within 2008-2009. An aggregate capacity of these power generating assets is about 24,000 MW (6,300, 8,700 and 9,050 MW respectively). They supply power to the areas, which are of strategic interest to Gazprom: the North-Western Region (TGC-1), Western Siberia (OGK-2) and the seats of large oil refineries – Ryazan and Kirishi in Leningrad region (OGK-6). Gas dominates in the fuel balance structure of these assets (over 90 percent for TGC-1), and it will be a good bargain for Gazprom. Besides, their efficiency factor is high, e.g. for TGC-1 it exceeds 77 percent. According to experts’ calculations, gaining control over this company alone will require purchasing additional shares for the amount of nearly $150 million.

Gas dominance

In Russia, gas-operated TPPs prevail in the structure of power generating capacities, as a result of protracted “temporary gas period”. Back in 1980s, the Soviet government made a decision to “temporarily” replace coal used by power plants with gas so the national machine building industry could develop more efficient technologies for coal and nuclear power industries. This “temporary gas period” still lasts.
Indeed, there are several advantages in using natural gas in the power generation sector: it is the cheapest environmentally sound fuel; gas plants are very flexible in terms of load schedules (they allow for the load reduction up to 50 percent per day as compared to 30 percent for coal and 10 percent for nuclear power plants); their construction requires less time and spending ($600-800 per kilowatt of installed capacity for modern plants); and they are defined by high efficiency. There is no competitive replacement for gas power plants in large cities with expected vigorous growth of power consumption, given severe environmental restrictions.
At the same time, there is a considerable difference in terms of regional distribution: in the European part of Russia, almost 80 percent of TPPs’ generating capacities use gas as a primary energy source, whereas in the east of the country, over 80 percent of TPPs run on coal and residual fuel.
To illustrate, the power generating sector of Sakha Republic (Yakutia) may be considered. It is a vast region with territory exceeding 3.1 million sq. km (more than territories of France, Austria, Germany, Italy, Sweden, England, Finland, and Greece together), which makes up 1/5 of Russia’s  territory. In Yakutia, they mostly use residual and diesel fuels to generate power. However, in the next four to five years, the structure of fuel and energy balance in the region will change radically. Now, Yakutskenergo, the largest power generating company in the region, spends 170,000 tons of oil equivalent (TOE), of which 99 percent falls to diesel fuel, to generate 419 million kWh. By 2015, its share will be reduced to 15 percent while coal and gas shares will grow from today’s zero to 58 percent and from 0.2 to 17 percent respectively. Changing over to coal and gas is of vital importance for the republic where only in the 1st Qtr of 2008 the diesel fuel price increased by 34 percent.
In the United Power Grid (UPG) of the Middle Volga, which includes eight power systems (Penzenskaya, Samarskaya, Saratovskaya, Uliyanovskaya, Tatarskaya, Mariyskaya, Mordovskaya, and Chyvashskaya), gas share exceeds 90 percent in the structure of primary energy sources. The Middle Volga UPG supplies power to the area with population exceeding 16 million; it is the national leader in terms of power consumption, maximal loads, installed capacity, and power generation. There are about 50 power plants operating in the macro-region, and there is virtually no alternative to gas at the moment.
Difficulties with gas supply are obviously the most acute problem of power generation. The “blue fuel” production increases too slowly compared to growing domestic consumption and export. It slows down the growth of gas supplies to power plants, constituting a major investment risk. It would be obvious even to a non-expert that investing in construction of gas power generation facilities without a long-term gas contract, seems unpractical at minimum.
Yet, sometimes it happens. For example, to new power plants in the North-Western TPP (St. Petersburg) and Ivanovo CCPs with capacities of 450 MW and 325 MW, officially put into operation in November 2006 and May 2008 respectively, gas supplies will start only in early 2010. Explaining the situation, Gazprom claims that both facilities were built without its approval. Ivanovo CCPs need an export gas line that will be constructed only in 1.5 year. To ensure supplies to the second unit of the North-Western TPP, the compressor station has to be upgraded by expanding its transfer capacities, and the upgrade won’t take place before the end of 2009. According to representatives of the power generating companies, angered by Gazprom’s reply, both units (nearly 10 percent of Inter RAO’s capacities) were constructed following the government’s order, so Gazprom was aware of this fact and could resolve the gas supply problems in advance. Meanwhile, these facilities receive less then 50 percent of the required gas volume.

Price issues of the post-RAO UES era

It is a known fact, that the RF Government decided to gradually increase “the blue fuel” price for domestic industrial consumers, to reach the level of equal returns from internal and export prices by 2011 (today, it is nearly a fivefold difference). As for non-industrial consumers, the population will receive gas at prices controlled by the state until 2014.
The growing rates for natural gas will negatively affect Russian generating companies, at least in the medium-term perspective. As an alternative, a burden of growing rates may be partially shifted to industrial consumers purchasing electric power in the deregulated market segment (these are mostly primary industry companies and processing companies). Under the circumstances, the power generating companies will have to search for investments to ensure development.
“I believe, in the future the environmental legislation will become even more strict, and new expensive measures will be introduced to enable better control of carbon dioxide emissions,” said Anatoly Chubais on  June 30, 2008, – the last day of his headship of RAO UES (the Unified Energy System of Russia). “In consequence, it will cost much more money to implement investment projects, which ultimately will prompt the increase in prices of a kilowatt-hour for the end user.” According to Chubais, the price risks should be regarded as the most serious ones. These risks are caused by convergence of three different processes, namely the launching of large-scale investment program in the Russian electric power industry, which resulted in the growing demand for equipment and affected its prices; the growth of an input megawatt cost at the external market (1.8-2 times for the last three years) that inevitably affected Russia’s power generation sector; and the world financial crisis that affected availability and prices of long-term loans. Industrial users in power-consuming industries, such as production of fertilizers, cement, steel-making, nonferrous industry, etc., will face the most serious problems. They will suffer both from growing gas rates and from higher electricity tariffs.
Meanwhile, Russia’s domestic gas consumption grows at a very fast pace, showing increase by more than 25 bcm for the last three years – the highest ever growth of gas consumption in the country. According to Miller, it is “a telling illustration of Russia’s economy being on the upswing.” Yet on the other hand, this fact may indicate that companies operating in Russia, including power companies, try to grab a larger piece of the “cheap gas pie”. Considering Gazprom’s large long-term export contracts, it may happen that gas supplies will run short for some local companies.

Guarantees for generation

Absence of additional gas volumes threatens to cause the electric power deficit in Russia, signs of which are evident even now. In the next three years, energy consumption in the country will increase nearly by 4 percent. To satisfy demand, over 22 GW of new generating capacities should be commissioned. However, in 2005-2007 only 4 GW of new capacities were put into operation.
To encourage construction of new facilities, the Russian authorities introduce a special procedure to guarantee return of invested capital for private investors. The essence of the Investment Guarantee Procedure (IGP) is that the state by means of tariffs will compensate for expenses with a pre-determined guaranteed rate of return on investment to a preferred bidder to ensure construction of generating capacities in regions with expected power deficit where construction of power plants is required urgently. The first step in this direction has already been made when the RF Government approved the procedure of granting guarantees for independent generation projects with a scope up to 5,000 MW.
Construction of the combined cycle electric generating plant near Tarko-Sale village in Yamalo-Nenets Autonomous District may be considered a starting project of similar type. Its first stage should be commissioned in September 2011. By 2013, the plant capacity will reach the calculated figures of 1,200 MW. Electric power to be generated by Tarko-Sale will be supplied not only to neighboring regions of Yamal, but to the Subpolar Urals as well. The plant will be operated by 340 employees; the annual volume of supplied power will amount to 8.75 billion kWh. One of the project’s features, which makes it quite attractive for investors, is the possibility to use low pressure gas from local fields where production is declining. The project feasibility study has been prepared by a joint venture of NOVATEK and OGK-5 – Severnaya Energeticheskaya Companiya. Together with NOVATEK and OGK-5Б SIBUR, OGK-3 and Rosneft also participate in the investors’ tender.

Is there an alternative?

As Alexei Miller reminds us: “Every second bulb in our houses lights due to gas, and nearly 70 percent of thermal power stations are gas-fuelled.”
Indeed, in Russia gas is used in abnormally high quantities compared to other energy resources. The country has enormous coal reserves, but it is inadequately represented in the fuel and energy balance. Meanwhile, efficient coal combustion technologies are available today, and they allow to make coal as efficient as gas. According to General Layout for Siting Power Industry Facilities Until 2020, generating capacities of nuclear power will increase by 2.3 times, coal power generation by 1.7 times, capacities of hydroelectric power station by 47 percent, and gas power generation by 41 percent. At the same time the gas share in electric power generation will reduce to 35 percent and  the  coal share will increase from 23 percent to 31 percent. The shares of other power sources will not change significantly. Redistribution of shares will require immense investments. In this regard, one may wonder how actively Gazprom will invest in coal power generation (its deal with SIBENCO – Siberian Coal Energy Company – has been postponed) to save gas and secure fulfillment of all its long-term obligations, both export and internal.

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