Can Russia Break into the EU Power Market?

By Kathleen Davis, associate editor

One Tuesday, I called Belgium to speak to an Italian man about Russia.

It’s like the opening line to a good joke, but these days power markets in Europe are serious business. And, whether Russia can become a player in those markets remains in contention. Different points of view bring differing opinions on the matter. We gathered three different views on the subject for this article: from the EU, from the RAO and from a well-versed consultant, Chuck Newton of Newton-Evans research.

Click here to enlarge image

Newton stated right off, “The single most important company in Russian electric power today is the RAO Unified Energy System (UES). UES is the largest power holding company in Russia, and generates 69.4 percent of the country’s electricity output. The company owns 96.1 percent of Russia’s high-voltage grids (2.5 million kilometers) via its FGC UES subsidiary and 77 percent of its distribution network (1.75 million km) in Russia.”

Indeed, RAO is still the giant of Russian power-generation or grid. And we’ll talk to RAO, too, a little later about what their intentions are with the EU market.

After consulting our three sources, we found this out: The fate of the Russian grid and the expansion of market interconnections in Europe is still very much “up in the air.”

Many questions remain: Will there be enough investment to warrant connections? Does that money, instead, need to be funneled interiorly into the former Soviet nation? Would Europe benefit greatly from more market grid connections, or will the EU members be footing a bill that will only benefit Russia, a form of generous market welfare?

Inside the EU

Our Italian man, Matti Supponen, works in the electricity and gas unit of the DG Energy and Transport section of the European Commission, a sector of the governing body of the European Union. He spoke to us as length about the potential advantages and challenges of connecting the Russian power grid more directly with Europe.

Overall, taking the EU as a whole, there aren’t a lot of imports going on. Period. There’s certainly a fair amount of shifting inside: Italy and the Netherlands are high on the power import list. France and Norway do some exporting. And there are a few connections from the EU outside: Morocco to Spain, a Ukrainian connection, and to Russia, through the Baltic States.

The Russian-Finland connection is a continuous import of around 1,400 MW. So, the idea of a grid/market connection to Russia isn’t completely far-fetched. In fact, in small doses, it’s already being done. But, expansions, so far, have been nixed.

“There was an additional project with Finland in the South of the country, but it’s been rejected by the ministry,” Supponen stated. “So, it hasn’t been built. That ruling has been appealed, but there is little chance of getting the connection through.”

We asked Supponen if there was a chance at other connections, at an increase in European-Russian interconnections. Supponen pointed to a synchronization study ongoing with the UCTE (Union for the Coordination of Transmission of Electricity) about the feasibility of more connections between EU members and Russia (as well as a number of other former Communist states now under the “IPS/UPS” label). The study is scheduled for completion in 2008.

“Many people think there will be two conclusions,” Supponen said. “First, the Russians will conclude it will be easy to synchronize, and, second, the Europeans will think, “ËœYes, it’s possible, but costly-a lot of upgrades of Russian control systems and power stations.’ The Europeans might not see it is as economically feasible.”

Worth the Dough?

And, is it economically feasible-on either side-to work toward a synchronous interconnection?

“It depends in which seat you are sitting,” Supponen commented. “The ones who think they can export massive power from Siberia to central Europe, I think they don’t fully understand how the market and connections work.”

As the EU works in zones, Russian power would have to be ticked through zonal “checkpoints.” The country zones on the frontline, Poland to Germany for example, are already very congested. So, on top of market issues, any attempts at large Russian imports to the EU would create a load of technical and congestion issues, Supponen added-as well as the leap of Russia tackling interior issues with grid upgrades and connections.

Newton, however, points out that Russia is beginning to do just that.

“A few months ago, Siemens was awarded a large contract for upgrading and refurbishing its mammoth and sophisticated energy management system installed at the RAO control center in Moscow, which serves as the national load dispatch center,” Newton said. “This system will incorporate leading-edge technology designed specifically to bring the Russian grid and grid management techniques into the 21st century.”

According to Supponen, there are still 750-kW lines on the maps in Russia. They run down into Hungry and other countries which could prove instrumental, in the long run, but they would require upgrades and synchronization.

Supponen commented, “The sad story is the Ukraine. They asked for an analysis of the connection from the Ukraine to the UTCE grid only. Russia sees this as a competitive request, and they don’t like that.”

Indeed, it seems that technical issues may not be the only hurdle Russia will have to overcome to become an EU market player. There’s also a matter of politics: internally, with old “brothers” like the Ukraine, and with EU members who may not be too keen on letting Russia in the game.

“It is very difficult to oblige [some member states], for example, Poland to connect the Russians. They are afraid of political pressure. So, they feel they might be pushed to do things they don’t particularly like,” Supponen said.

He added, “The political will of the whole EU is one thing, but the will of the member states can block the overall will from happening.”

Supponen sees this particular political issue-the struggle between the overall EU will and the individual wills of the member states-as the most critical, not just with the grid, but across the board with EU oversight.

“This is a very common phenomenon,” he commented.

In the areas of electricity, the EU faces the same problem that deregulation had in the U.S.: The ones who already have cheap electricity are not keen on changing the status quo, but, of course, the ones with higher electricity prices are more interested in massive reform.

But, can Russian power really be a big part of that reform? Can it really bring relief?

A Peek into the Future

“My personal impression is that Russian power in the EU is marginal,” Supponen stated.

He added, “There were some presentations about Russian power in the past, and they talked about 6 GW or so to central Europe. Even that would require a lot of building. If you calculate that, overall, it’s a small percentage of the whole EU. This could serve as a marginal added value, at best.

“I have nothing personal against Russian power-if properly produced and properly connected, it could offer good competition in some areas. However, one should not simply let Russian electricity come into the market without the option to export to Russia or invest in it.”

Speaking for the EU, he continued, “There needs to be reciprocity. It’s our mantra.”

Newton added that significant investment is needed internally in Russia, and that might derail any plans for the country to work outside of the box.

“The Russian electric utility business remains structured operationally, much as it did in Soviet times,” he said. “The Russian power delivery industry infrastructure is still in need of substantial investment in technology upgrades and automation system replacements, and such investment has been slow to develop. With the 2006 privatization efforts at the national level, there is hope for new investment into the distribution operations of the energos (regional energy companies) during the 2007-2011 period.

[Editor’s note: See sidebar for Newton’s breakdown of the Russian grid structure, pg. 28.]

“Nonetheless, the Russian electric power delivery industry has managed to keep the lights on for nearly 200 million consumers. Russian-based generation facilities continue to provide export opportunity to the country, with sales made to neighboring countries and former Soviet bloc states,” Newton added.

Supponen, too, believes there is hope to keep using Russian power on “edge” countries like the Ukraine, Romania or even Poland, if we can find a “win-win situation where the connection could make sense.” But, for other EU members, like his home country of Italy, he sees no dawn of Russian imports sluicing across the wires and into Rome.

“For Italy-for me-no. That’s too far away to think about Russian electricity ever landing there.”

So expanding connections might be farfetched, but what about current connections, like Finland? Is there potential to ratchet up that market? Supponen doesn’t think so.

“Finland is pretty much saturated. That was the main argument for not accepting the new interconnection in the South. It’s close to the limit of what the Finish politicians will accept,” he said.

“Estonia and Lithuania are self-sufficient. Latvia imports-but mostly from Estonia and Lithuania.”

Well, if everyone is happy, if everyone is satisfied-or if they just want to play politics-how can Russia ever become a potential market player in the EU?

The short answer: Money.

The long answer: Money and a willingness to have an “open marriage” with the EU. The EU can be in bed with Russia or Asia or the Middle East, and Russia can do the same. And, everybody’s happy.

Supponen has a few suggestions for Russia to be a player in the EU market:

  • Solve the question of synchronization.
  • Develop a comprehensive strategy.
  • Don’t focus blindly on potential market exports to the EU.

“Exporting [electricity] is a simplistic version. To be present as a market player, look at investments inside the EU. Going away from Siberian power moved to Paris and moving toward investing in a plant near Paris, for example,” he stated.

Supponen added, “If the thinking moves from simple exporting to market integrations, then the starting point would be more sound, from [the EU’s] perspective. Russians invest inside the EU, EU invests inside Russia. The market idea is much more realistic than simple exports, and much more feasible. There are some investments already made in Russia, in small pieces. How stable those investments are, no one knows. But, there has been some movement there.”

But, Supponen thinks that Russia-for all its big dreams of market participation in a smooth EU power grid-may have to hold back on that until internal issues are resolved.

“Many people think there are so many big challenges inside of Russia that they will be concentrating inward rather than outward,” he commented.

Inside Russia

Newton agrees with Supponen, pointing out that investment has often been from the West into Russia rather than the other way around, especially in the form of vendors and suppliers.

“Key Western suppliers already in position in Russian T&D markets to provide substation automation equipment and services include ABB, the current leader, having early-on established partnerships with Russian firms, and with the installation of at least 60 mid-sized SCADA systems since 2001, and dozens of substation automation installations,” Newton said.

“At the national level, Siemens is the technology leader, with large systems at the national control center level,” he added. “And, in Moscow, the award for a national control center that went to Siemens for the second time in 10 years, suggests a strong relationship with Siemens PT&D is likely to flow over to the substation segment.”

Newton listed a number of American firms now active in Russia, including GE (although theirs is heavily generation). They join European powerhouses like ABB, Siemens and Areva T&D as well as “second tier” suppliers such as Schneider, Thales and newer arrivals on the scene from Asia, also active in niche segments. U.S. firm Advanced Control Systems is in the Russian game as well with two SCADA systems and RTUs installed (Nizhny Novgorod and Arkhenergo).

And, finally, here at the dàƒ©nouement, in comes Stas Degtyarev to our story. He works specifically with RAO’s UES arm in Russia and spoke to us long distance from Moscow.

He sees a bit of a middle ground in the picture: a Russia looking inside right now in the hopes of looking outside in the future.

“Today Russia’s electric power sector’s primary objective is to focus on the internal customer. And RAO UES’ new investment program is a response to a high demand for electricity suffered by a number of Russia’s regions. But it doesn’t mean that RAO UES has no projects to expand its transmission connections with Europe,” he said.

He cited that same study that Supponen brought up earlier with the UCTE as one way Russia is looking toward a potential future with the EU, although he admits that, right now, no one has definite plans to act on market-based investments or grid investment. [Editor’s note: See secondary sidebar for Stas’s peek inside the UCTE study from the Russian perspective, above.]

For the moment, the focus is entirely on generation when it comes to foreign money.

“Currently, Federal Grid Company (FGC) and regional transmission companies, which manage the Unified National Electricity Grid and regional grids respectively, and the System Operator (SO) are wholly owned subsidiaries of RAO “ËœUES of Russia,’ and in the future they will be handed over to government control,” he stated, although he didn’t give a specific timeline for that relinquishment.

“It is planned to attract strategic private investors in the thermal wholesale generation companies,” he added, but couldn’t give any date when there might be an opening for investment in other areas of Russian power.

He concluded, “In other words, grids will be closed for private investors while generation will attract only private investments, including foreign.”

According to Degtyarev, the current RAO UES five-year investment program implies 34,200 MW of commissioning. The total amount of financing for the program will make $118 billion. RAO UES companies will spend over RUB1.8 trillion in funds on new power unit projects, but the grid, at this point, is simply being upgraded in smaller chunks and spots with outside vendors coming in to patch up issues here and there, as Newton discussed earlier.

“The large-scale generation capacity expansion will be accompanied with the adequate construction of power grids,” Degtyarev stated. “More than RUB1.3 trillion in funds will be spent on the grid infrastructure development during the period until 2011. This part of the program will be financed with the power grid companies’ own funds, charges for new connections, government investments, and proceeds from the sale of the WGC and TGC shares owned RAO UES of Russia.”

So, it appears, while UES certainly isn’t taking the possibility of being a future EU market player off the table, no one is really sure about much more than this: The money in Russia, right now, is focused on upgrades and generation investment, and the concept of a perfect grid that allows Russia to sell its power to a hungry EU, well, that remains a nice little fantasy without a timeline for actual completion.

The process of this article brought a repeated vision to my head, especially after talking to Stas. It reminded me a bit of Hans Brinker-sort of. In metaphorical terms: It’s difficult to dream of the future and power of hydro-dams if you’ve still got your fingers in the dike trying to keep all those precious drops of water from leaking out.

An Inside Look at Russian Power Grid

STATS:

  • approximately 8,600 transmission substations
  • approximately 22,400 distribution substations
  • transmission substations are largely owned and operated by RAO UES
  • distribution substations are now owned and operated by the 70 or so district energos
  • about 80 percent of the transmission substations are equipped with basic RTUs
  • about 25 percent of distribution substations are configured with RTUs
  • best estimate of spending among all Russian energos for T&D substation automation: below $100 million, including less than $40 million spent with outside firms
  • best estimate of spending among all Russian energos for T&D substation and pole-top RTUs: below $25 million per year

TRENDS:

  • short-term trend: a need to patch up existing infrastructure at the T&D levels
  • business trend: relying on Western sources and technology
  • long-term trend: continuing increases in electricity consumption and greater revenue growth due to improved collections, competitive market development
  • regulation trend: deregulation and privatization of the electric power sector will probably outpace the rate at which deregulation is proceeding in North America

-Chuck Newton, Newton-Evans Research

The Details of the Synchronization Study

In 2002, the Electric Power Council of Commonwealth of Independent States (EPC CIS) chaired by Anatoly Chubais expressed interest in the synchronous interconnection of the power systems of the CIS countries and the Baltic States (IPS/UPS) with the power systems of the members of the Union for the Co-ordination of Transmission of Electricity (UCTE), leading to the ongoing study.

  • The study is unique in its ambitions and scope. Presently there is no existing electricity system in the world spanning more than 10 time zones with different load characteristics and various generation structures.
  • The project is designed for a total duration of three years and was started in April 2005.
  • The work of the UCTE consortium is co-financed by the Trans European Network (DG-TREN) program of the European Commission.
  • After the kick-off meeting in April 2005, first activities included the analysis of the present technical, organizational and legal status in IPS/UPS including data acquisition by a questionnaire. The survey was finalized in February 2006.
  • In parallel to the data acquisition process, the installation of a Wide Area Measurement System (WAMS)-similar to the one operating in UCTE-has been performed. At the end of 2006, 24 measurement devices were installed and in operation in IPS/UPS countries.
  • A first common load flow study model reflecting a winter peak load scenario for the year 2008 has been prepared. The simulation model consists of about 4,000 nodes, 6,600 line and transformer branches with a total peak load of 580 GW. Based on this model first load flow calculations were performed in order to allocate possible transfer capacities across the interface and the most probable load flow pattern concerned for various power exchange scenarios.
  • The dynamic simulation models for both synchronous areas are under preparation and on schedule for the finalization of the study in 2008.
  • More information on the study can be found online at: http://www.ucte-ipsups.org/

-Stas Degtyarev, RAO UES

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