Russia’s electricity industry: the good old days are gone

Vladimir Putin has been regaling TV viewers with his memories of the good old Soviet days when electricity was cheap and Russians paid their utility bills on the nail. But fond stories from the Russian prime minister’s past may just rub salt in the wounds of his people as a sharp increase in energy prices kicks in.

The government has sanctioned a 15 per cent increase in household electricity tariffs in 2011 – well above its inflation target. And in a final break with the Soviet past, energy prices for industrial consumers have been deregulated altogether.

Industry experts say higher electricity prices are essential to stimulate investment in Russia’s aged power plants and prevent a collapse of the system. But hiking prices is politically risky, particularly in a country where energy supplies have been subsidized for so long.

“I remember very well how my father would go out onto the stairway and carefully, in the most attentive way, write down the numbers on the electricity meter,” Putin told a Russian TV interview at the weekend. “You know our older generation is very punctual and scrupulous. It was just kopeks then, but he noted each kilowatt and always paid on time.”

Putin is not in a position to be sentimental about rising energy costs. His government is facing a dilemma as investors warn that without higher prices they will be unable to raise the estimated $100bn needed to modernize generation capacity and meet Russia’s rising demand for power. At the same time it is politically risky for the government to allow energy price hikes, particularly in an election year.

“The reality is Russians have to pay higher electricity prices,” says Derek Weaving, electricity analyst at Renaissance Capital. “The government wants a viable electricity sector, but it does not want to kill the economy.”

The deregulation of industrial prices marks the final stage of sweeping power sector reforms that have seen Russia dismantle the UES state electricity monopoly and move the bulk of heat and power generation into the private sector. The government has retained control of the federal grid company, the systems operator and nuclear and hydroelectric plants.

Russian oligarchs and European utilities , including Germany’s E.On, Enel of Italy and Fortum of Finland, were allowed to buy cut-price power plants on condition that they invested in modernizing and expanding capacity. In exchange, the government promised to deregulate electricity prices to ensure power generation companies decent returns.

But as elections draw near, investors are worried that the government will back away from the deal and cap electricity prices to prevent political unrest.

“That would have a negative effect on stock prices and a chilling effect on desperately needed investment in the sector,” says Daniel Wolfe, deputy general director of Quadro, one of the 15 territorial generating companies spun off from UES. “The government has to keep its side of the bargain and allow electricity and heat prices to rise otherwise there are likely to be increasing power and heat outages.”

Another threat facing power producers is that Russians, dismayed by rising prices, will find ways to duck their electricity bills. “Meter doctors” in some parts of Russia are charging Rbs2,000 ($55) to help customers modify their bills to manageable levels. Such fixes were not available in Soviet days. Putin’s Dad could have ended up in a gulag for fiddling his meter.

Related reading:
Russia file, beyondbrics