Energy reorganization program

— Mr. Chuvayev, do you think commissioning of Nyagan GRES that took place in September 2013 may be considered a milestone event for the company?

— Commissioning of two power generating units of NGRES for commercial service in 2013 permits to claim that we have reached the peak of investment and moved to the final stage of implementation of the mandatory investment program. Speaking about this event in terms of assessment, I would say that commissioning of Nyagan GRES is a milestone event not only for Fortum Corporation but for the power industry of Russia in general.

NGRES is the first greenfield thermal electric power plant in Russia that was constructed after the collapse of the Soviet Union. It may be compared with the best global solutions in terms of feats of engineering, equipment and technologies used during construction of thermal power plants under adverse arctic conditions. The plant efficiency is about 57-58% which is one of the highest rates that may be achieved in the exhaust-fired-boiler cycle. The national average efficiency is approximately 35%. If the plant operated in the cogeneration mode, its efficiency would be even higher. There is a possibility to construct a heating main from NGRES to supply as much heat to Nyagan as the town needs. At the same time, its cost would be much lower compared to the cost of heat generated by in-town boiler houses.

 

— What was the main factor that enabled raising intensive foreign investments in the Russian power industry sector? 

— The energy reorganization program in Russia has become one of the largest programs in the world. The program originators, the President of Russia Vladimir Putin and the management team of RAO UES of Russia headed by Anatoly Chubais, had enough political will and commitment to put it into action. As a result, the industry has obtained investment in the amount of around USD 45 bln, reliability of electric power supply has increased manifold, combined-cycle technologies have massively arrived in the sector. Private investors have assumed obligations for construction of new capacities. For the first time after 2008, actual construction projects were launched, our construction sector finally got breathing, machine-building enterprises came to life. Our Russian and foreign partners got new orders. Liberalization of the electricity and capacity market was accomplished. The basic investment return mechanism (CSA, or Capacity Supply Agreements) now operates and determines the investment climate in Russia.

 

— Why would foreign companies want to enter the Russian market in this unstable environment?

— Fortum saw and still sees a huge potential in Russia, both in terms of energy consumption and technological development and modernization of this industry sector. That requires not only significant amounts of investment but serious application of knowledge and competence that the Corporation possesses to the full extent. The world recession has affected all the processes and has had an impact on energy consumption throughout the globe. Against the background of the European economic situation, the development process in Russia was more stable compared to previous years. As of today, general market forecast for Russia is more positive than for Europe.

 

— Fortum JSC has been actively introducing cogeneration technologies at its facilities. What is barring Russian thermal power plants to adopt combined generation and perform modernization with account of combined heat and power technologies?

— CHP is one of the most efficient technologies of energy generation which allows reaching almost 85% of primary fuel energy efficiency. With cogeneration thermal power plants, it will be possible to develop multi-fuel combustion technology by using flexible mix of energy sources and to promote utilization of renewable power sources as Fortum does at its facilities throughout the world.

 

Modernization of central heating station

 

One of the headwinds is unenforced heat reform. There is quite a specific and detailed reform blueprint; statutory regulations have already been adopted, but there are still some essential bottlenecks such as development and approval of heat supply schemes. Last year, only the very few of them were approved.

Municipal authorities are not too eager to adopt those schemes because right away, the latters will demonstrate the advantage of cogeneration over construction of boiler house plants. Most municipal authorities are interested in construction of boiler houses since it is easy and usually performed by affiliates. Lots of gas gets burned but the tariff rate is based on the CHP tariff. This being said, CHP plants are dying, and the number of boiler houses is growing.

Back in the day, the Soviet Union was the leading nation in combined generation. We demonstrated to the world that the centralized heat supply and combined generation were the most effective fuel utilization technologies. Nowadays, in the today’s market environment, each single per cent of efficiency is not only a matter of power industry survival and competitiveness of companies on the market, but hundreds of millions of rubles taken out of consumers’ pocket.

 

— What specific targets would you like to see delivered in the short run?

— That would be transfer to pricing method during generation of thermal power which would preserve generator’s and heat network companies’ savings from energy-efficient technologies. That would be pricing based on the “alternative boiler house” principle which would send to a consumer a distinct signal about cost of the heat from different sources, eliminate the problem of non-transparent “boiler tariff”, and make owners of non-effective boiler houses either shut them down, or upgrade them and adjust the price in order to meet the competitive level. That would be common introduction of thermal power consumption measurement in order to improve efficiency and to reduce heat losses. Even now, the total stated in a heating bill of a Russian consumer is more than the same figure in the European countries. It is important to use the utility bills payments not to “fix” the grids by taking a "band aid" approach, and not forward them to the pockets of owners of the boiler houses heating up the air, but to real investment in modernization of the whole heat supply system. Also, we have to resolve the issue about the production sector that has moved to its own sources. The production sector subsidizing the population in terms of heat prices has turned its back to the centralized heat supply system and has built its own boiler houses. A boiler house tariff is on the average 20-30% more expensive than a CHP tariff. Over the fence here, we have a manufacturing enterprise that would like to come back to us, and we will be happy to establish a favorable tariff for them to make them shut their boiler house down and stop bargaining the gas away. But they simply cannot come back since they will immediately be imposed with cross-subsidization and indistinct regulations.

It is necessary to let manufacturing enterprises conclude direct contracts with wholesale heat generators. However, it is impossible to do that in the regulatory institutional environment existing in Russia today. At the end of the year, the Ministry of Energy has completed elaboration of new regulations covering heat supply. Those regulations were already marked as critical for the industry back in the time of Chubais reform. A draft amendment to the Heat Supply Act was published. We hope that this initiative will be implemented in practice because the heat supply system needs immediate investment and fundamental upgrade.

 

Construction and commissioning of a new pipeline ChCHP-3 – ChGRES: 

“Loop heat supply scheme” project, Chelyabinsk 

 

— How exactly the decision of the Russian Government to freeze the gas and electric energy tariffs will affect your company’s operations? What do you think about it?

— Let me give you an example that will show why I disapprove freezing of heat tariffs. We have made calculations and compared payments made by people in Chelyabinsk and Helsinki. The payments turned out to be the same, but the tariffs in Chelyabinsk are three times lower than in Helsinki. That means we consume three times more heat energy – extraordinary inefficiency!

The artificial drop in gas prices for some short term will result in more severe increase in electricity prices in the future. Restraining gas prices will deprive the industry sector of natural economic incentives for modernization. Degradation of electricity and heat supply systems will continue its rally. Eventually, we will have to establish artificial subsidization mechanisms for the industry, and come back to customers for more money.

 

— Do you think the third component of the power industry reform is a reform of the gas market and liberalization of gas prices?

— Manufacturers claim that gas and electricity prices kill competitive ability of the Russian industry. All of them are united in the certainty that the country has to get off the gas-and-oil needle. To do that, does the energy products price have to be high or low? If it stays low, no one would have an incentive to do that. Speaking about power industry, there are no more incentives for the sector modernization beyond capacity supply agreements.

Another serious incentive would be increase in gas price up to equal-netback prices in Europe or let’s say the US. There is no Gazprom monopoly now. Quite the opposite, there are independent suppliers that will be happy to deliver competitively priced gas. As soon as the liberalization of the gas price takes place, please be assured that the price will fall right away. Everybody will benefit from it. Well, maybe they will lose over some short period of time but then, the market will claim its own.

 

Nyagan GRES

 

— What are the most pressing issues in the field of electric power transmission today?

— Over the last few years, accelerated growth of power transmission costs for the production sector has transformed into a situation when Russia surpassed Finland in terms of such payments and is now coming close to Germany. In Russia, the network component of the tariffs imposed on industrial consumers has already reached 40% and keeps growing. In Europe and the United States, the share of the energy transmission component amounts to about 25%. Such a high tariff rate for transmission services creates totally new incentives for Russian electric power industry such as large-scale construction of own generating capacities by industrial consumers. In fact, such consumers usually have all required infrastructure for construction of a local energy source. Moreover, they are able to beneficially use such properties as combined heat and power generation. In spite of a relatively low efficiency of such power units and their higher capital, unit and operating costs, they are still more competitive than large CHPs thanks to the fact that a consumer using local energy sources does not have to pay high electricity transmission tariffs.

At the same time, the networks themselves did not go anywhere. The adverse effect of the foregoing is that expenses on a network required for energy supply reliability but not actually used are placed on consumers that are still linked to the centralized system. That boosts such consumers’ costs and improves incentives for local sources. And that is a grave threat to the system.

The main reason for high network tariffs is unbalance of investment programs of utility distribution companies. Nowadays, neither generators nor consumers have an organized platform for discussion and approval of key financial and economic performance of utility distribution companies although some positive change with regard to that situation have been recently observed.

 

Chelyabinsk CHP-2

 

— What are the company plans for the current year?

— By commissioning of power generating units of NGRES for commercial service, we have brought in about 60% of capacities stated in the investment program. We will still have to commission the third power unit of NGRES. Also, we are facing commissioning of two power units at Chelyabinsk GRES. Those are the main tasks that we are planning to perform in 2015. 

The ongoing reconstruction of some power plants with obsolete equipment will be continued since it inhibits our competitive ability at the electricity and capacity market. In 2014, 88 MW will be commissioned at Chelyabinsk CHP-1 – deep upgrade of the plant will allow making it closer to the effective combined generation in the mode of a combined cycle gas turbine unit. We will also have to continue works related to modernization of the heat network equipment complex in Chelyabinsk and Tyumen, and we hope to use the approved heat supply schemes in those cities while performing the abovementioned operations. It will be hard work. At the same time, it gives us professional satisfaction.

 

By Elena Bereziuk