THE FAR EAST:

СЕО: We develop the power industry of the Far East in line with business principles

- Mr. Tolstogusov, whenever the Far East is the point of discussion, people tend to think primarily of problems. Your company functions only in this area - so you face these problems all the time. Do you ever get the feelingthat these are the Labours of Sisyphus? 

Oh no, definitely not! We and our parent company “RusHydro” see the huge potential of these territories. Yes, it's true that the economic development of the Far East is a large, time-consuming and complicated endeavour - but at the same time it's a fascinating task. Of course, we do have problem -long distances, the severe climate, floods, decay of the main infrastructure (and even its total absence at times), and the low population density...his list could go on and on.. But it's been always like this: since the Soviet times when our fathers and grandfathers trudged through taiga and built hydro-electric and thermal power stations right on the frozen ground. They understood as well as we do that the Far East  holds the richest minerals, undeveloped oil, gas, coal, gold and other resources.

The prime concerns of our sector of the economy – the power industry - are clear. There are vast opportunities for the growth of traditional segments of our industry. The developed hydro-electric power potential of the rivers does not exceed four per cent. The power generation based on the renewable energy sources is also available in this area.  We see vast development perspectives in this area.

- But all this potential was only minimally developed in the Soviet era?

- The Far East as a region and the power industry in particular was never developed according to any commercial paradigm. There were other priority tasks: defensive capacity, protection of borders, provision of essential services’ in villages and towns, so that people would not freeze without light and heating.  Energy facilities  were often built in a rush, barely keeping pace with  industrial development and city growth. Apart from that, the location of the facilities and applied technologies coincided with the economics and industry of that time. Most of the organizations for which these facilities were built either don’t exist at all nowadays, or they work with the new technologies.

The existing energy system was created for a dramatically different regional economy. Apart from that there are characteristic features which distort the functioning of the energy system. The most effective facilities of their generation – hydro-electric power stations – are located within the Amur energy system, but the main consumers are situated  in the Primorsk and Khabarovsk areas. As a result, there is a need to transport energy of about 3-4 GWt across several thousands of kilometers.  This results in a high level of power loss in the grids, large volumes of reservation, fuel over-fire and  all this pushes the costs even higher. We also inherited a whole array of other problems.

In fact, today is  the first time that we are trying to develop the power industry of the Far East region - in cooperation with “RusHydro” = in line with technological logic and business principles. It is clear that attractive investment and development conditions will not emerge immediately. This work will take a long time, and we are still at the very beginning of it.  But we must develop  the power industry of the Far Eastern region based on the principles of  return on investment, transparency and predictability of the rules of the game, and the continuity of tariff regulation.  Let new projects have longer payback periods, than in the European part of Russia.. Let the state endowment here be lower than in more habitable areas. I think that the Far East is the economic region that has diverse instruments for long-term investment.

- As you evaluate the situation from a commercial point of view, could you tell us whether the company possesses enough financial resources to achieve all these tasks?

- Without external support we won’t be able to unlock the potential of the Far East - this is quite obvious. In fact, the Far East is not very well-developed in terms of essential infrastructure to date – I mean roads, as well as railways, aviation and power industry. In the  Soviet era there existed a particular system with isolated generation centers and low electric power flow by  grids. Furthermore housing has aged a lot since that period. At the same time I can’t say that we start from scratch. We have the fundamentals. The question is how to make them more effective.

- Do you have any answers to these issues?

- We are working on this daily. First of all, I am stressing the optimization of all of the projects in power generation system – it is a routine actually, but it brings good results.

Today we count on the optimization of the debt portfolio with the help of our parent corporation “”RusHydro”. As you know, there is an agreement under assessment between “RusHydro” and VTB bank which includes fundraising to cover loan refund. This will release a significant tranch of funds that is now directed at covering loans. This sum amounts to up to five or six billion rubles, I think. That is comparable to the average volume of large-scale and ongoing repairs within the whole Holding.

On the other hand, we work under conditions of decreasing fuel costs, with their share in our nuclear generating costs amounting to up to 70 per cent. Gas infrastructure development in the Far East regions significantly supports our ventures. Due to gas we have a possibility to diversify the “fuel package”, especially in the distant areas.

For example, both power stations in Petropavlovsk-Kamchatsky run on gas, not on oil. The gas-conversion of the Vladivostokskaya-2 station is currently ongoing

New gas power-generating units function at the Yuzhno-Sakhalinsk TPS-1, and earlier a gas unit was set up at the Khabarovskaya SDPS-3. Similar operations were conducted at other stations in Khabarovsk. Following this logic, a new construction program was set up to enable RES-generation in isolated areas: here, we are forced to transport thousands of tons of diesel fuel annually.

- The program of developing renewable energy sources includes constructing about 170 facilities forsolar and wind power generation. Will it pay off?

- Absolutely. It is one of the most commercially effective areas of our development. Here, everything is clear: we construct a solar battery or a wind generator to support the diesel power station - and then we get a noticeable saving on fuel. So we cut the volume of fuel supply in a particular region. For instance, eight solar power stations in Yakutia allow us to save up to 61,6 tons of diesel fuel annually. That may not seem much, but when the program is over and we bring in 120 MWt of power-generation, about 46,47 thousand tons of diesel fuel or 1.29 billion rubles can be saved. That sounds good to me!

- RAO “Energy Systems of the East” has not only a significant loan portfolio, but also a high level of consumers debts: about 23 billion rubles. Can this “Gordian Knot” be cut at all?

- Yes, consumers cut on payments everywhere. In general the debts accumulate primarily in the household and utility sector because of the intermediaries – the managing companies, Housing Associations etc. We reckon that sales regulations should be changed. In prospect, we need to undergo a transition to a pre-payment system to cover light and heat supplies. We don’t have this kind of system so far, but we cover the debts with the help of all means available; however, we try introducing a direct payments scheme to our clients and supply companies.

On four thermal power stations’ construction projects

- What is the current stage of the ongoing construction of these first priority projects? Recently, the Audit Chamber of the Russian Federation made a statement on significant delays in the construction schedule.

- These four objects have been under constant scrutiny from the very start, so we are absolutely certain  how these are going. They are constantly within the focus of attention of Sberbank, Ministry of Energy Industry, the Audit Chamber and independent auditors. This project monitoring system is unprecedented for Russia – that has simply never been done before. We got used to working under such conditions, but I cannot say that it was easy. I have a high opinion about the auditors’ control in this project - they are very helpful and always keep us in good shape. In this case "RusHydro" and our experts as well have already explained that the data announced by the Audit Chamber of the Russian Federation reflect  only the endorsed equipment costs in accordance with the accounting documents: primarily the data reflects the readiness of all facilities at the planning level, especially in terms of technical aspects. According to the schedule, the construction of the Blagoveshchenskaya TPS is currently in its second phase; this year we are going to launch the project. In Yakutsk we have already set the gas turbines on the foundations of the future power plant, so in this region everything is going according to plan as well. By winter, the thermal circuit of the main building will be complete, and then all technical works related to the set-up of the equipment can be carried out even in the most severe frosts. We have two more sophisticated construction projects currently underway in Sovetskaya Gavan and Sakhalin. However, the deadlines for these projects are set for 2016-2017. Unlike Blagoveshchensk, in those areas there we are building thermal power plants from scratch, practically in the open field. Thus, here we have absolutely different workloads.

- How much money from these 50 billion rubles has been already spent on these projects?

- More than 43 billion rubles.

- Finally, the estimated costs of the four first priority projects at the Far East amounted to 87.792 billion rubles. Why is it so gross?

- It was clear from the very outset that the costs of construction of these four plants will exceed the amount of the allocated budget; it is obvious that new construction projects are very expensive. But you should understand that when a decision to recapitalize was made by "RusHydro", there were no estimates of costs of these new stations’ construction. Land sites were not defined; there were no finalized market tenders to select general contractors and equipment manufacturers. Another thing is that it would have been impossible to start without these 50 bln of funds at all. This is the major part of the total amount of funds. Budget funds are mostly allocated for the purchase of basic equipment and for covering the payment obligations to the contractors, who are responsible for the most important stages of the construction and installation works.

- The costs of the Sakhalin CDPS-2 increased the most – now it accounts for more than 34.7 billion rubles. Why so?

- During the exploratory works at the site the preliminary project costs were slightly changed. For example, Ministry of Energy decided to run the Sakhalin CDPS-2 on coal instead of gas fuel. That circumstance, alongside with a legislative ban on the use of open water intake and the forced use of dry cooling towers caused significant cost increases in  all the projects. But it is only a nominal increase: we have already defined the real costs of this  central district power station during the process of the documentation endorsement.

- Meanwhile, what is going to happen with the still functioning Sakhalinskaya CDPS? Oleg Kozhemyako - appointed provisional Governor of Sakhalin – has announced his opposition to the prospect of shutting this station down. Did you manage to resolve this conflict?

- There was no conflict. The governor asked us to create a special strategy for the development of the Poronaisk region infrastructure in accordance with the new plans: the government plans to build large greenhouses, poultry and pig farms in the surrounding area of the working CDPS to provide the population of Poronaisk and the nearby settlements with vegetables and fresh meat all year round. All these will require considerable power capacities, that are to be supplied by the Sakhalin CDPS as well, since it is located in this area. The operational life of the station will be extended for the next ten years at the least. I would like to note that the hydro-electricpower station is still maintained in a working mode and its resources have not been fully exhausted yet.

- To round up, let us talk about the expected effects. How would they influence the economies of the regions?

- Only in a positive way, I believe. Firstly, these projects have 553 MWt of electric power and 875.2 Gcal/hr of heat power – very modern and efficient.. The new heating power capacities (everywhere except Sakhalin) are as important for the region, as additional electric power. This is especially important for Yakutsk and Blagoveshchensk: in Blagoveshchensk, some neighborhoods are not connected to heating systems due to the limited capacity of the existing thermal power plant. A new thermal power station in Sovetskaya Gavan will finally allow villagers to have hot water all the year round, not only in autumn and in winter, as they have now.

Secondly, it means new jobs for the residents of these regions. More than 5.5 thousand people already work on the construction sites. And afterwards there will appear jobs for specialist staff who will operate the new station. The Coal Power Plant in Sakhalin will create a demand for local coal which will spur further growth in the industry.

Finally, there is one more effect that stems from creating new energy reserves. Despite the seemingly small amount of inputs, even these megawatts will create a power base needed to implement large-scale investment projects: from the second branch of the Baikal-Amur Mainline to the development of port terminals, ship repair centers and fish- and seafood-processing hubs. In other words, the power factor will stimulate the growth of other industries and will create new jobs. Of course, this will have an impact on tax revenues in the regions’ budgets.

On demand and potential

- New thermal power plants will primarily replace the outdated and decommissioned  facilities. And what about the future demand?

- Out of 4.4 GW of new power that is to be generated at these plants, according to our estimates, more than half - or 2.5 GW - will be allocated to replace the outdated facilities. 1.4 GW alone is needed to cover future demand. But we do not exclude the prospect that even more power may be required.

- Why so?

Basically, the new capacities will be in high demand within the framework of the Unified Energy System (UES) of the East, as well as in Yakutia, Kolyma and Chukotka. "Rosneft", for example, could build a complex of the East petrochemical company; this will demand up to 200 MW of power. The gas transportation system - "The Power of Siberia" - may produce a demand of up to 600 MWt for its pumping stations and gas chemical facilities. So, due to the advanced development territories (ADTs) that are now being created in the Far East even more large-scale industrial projects will be constructed.

- Do you already have a vision of how much power is required to support the ADTs?
- According to the approved project documentation, the confirmed consumption volume of these projects amounts to 350 MW. But, I suppose that the demand will be even greater.

- How do you expect this future demand to be covered?

- There are projects that have already been listed in the investment program of "RAO ES of the East". We will be able to achieve certain volumes by removing the grids’ restrictions that currently slow down the efficient usage of the power generation facilities within the UES of the East. Finally, "RusHydro” already has new hydro-electric power stations projects which also are important power generation sources.

- What investment projects of "RAO ES of the East" would you name as first priority projects?

- There is no secret here. Apart from the “Vostochnaya” TPS in Vladivostok, which is now being finalized, there are Artemovskaya TPS-2, Steam-gas unit on Vladivostokskaya TPS-2, Gas –turbine unit -TPS Zmeinka and Sinaya Sopka in Primorye, TPS Bilibino in Chukotka, as well as the second stage of the Yakutsk CDPS-2 and Khabarovsk TPS-4. All these projects are developing actively, and they are ready for major federal inspection; we also search for funding sources and introduce mechanisms of  investment returns in the future to the State.

I’d like to note that most of the projects that we are implementing right now or planning to implement in future are aimed at improving the reliability of power supply. For example, we are now working on the design of the heating main TM-35 in Khabarovsk. The project is quite local, but it will allow us to encircle all three Khabarovsk thermal power plants in a single technological chain. Obviously, that will widen the window for maneuvering. Our company has a lot of such projects. As I said before, the priority of these projects is explained by the fact that the major inputs are aimed at replacing the retired capacities. We cannot avoid that.

- What level of power demand do you expect to have in the isolated electricity systems of the Far East?

- As I said before, we expect the greatest growth in the Magadan region, Yakutia and Chukotka. The development ideology there is quite different. For example, in Kolyma the energy system already produces a lot of excess power. As soon as the "RusHydro"   finishes the construction of the Ust-Srednekanskaya HPS, the surplus will increase even more. Earlier, we expected this capacity to be required for the new gold-mining Mining and Processing Plant and the mines. But the market conditions changed and the prospects of these objects have moved into a more distant future. Still, we found a way out. We are working on the project of a hydrogen plant construction in partnership with the Japanese Kawasaki  and RusHydro company. This is an innovative project; the market has not been set up for it yet: we can be the pioneers here. We are interested in loading our hydro power plants on the Kolyma River up to 510 MW of power capacities. Cheap energy and clean water are the essential elements for creating such generation capacity here. We are ready to provide it to the Magadan region.

We expect to see growth in the other isolated regions as well. In Chukotka, for example, we expect to have up to 242 per cent growth rate, mainly due to the resource extraction projects.

- Is it possible to cover this demand by integrating the isolated energy systems?

- There are technological limitations on the transfer of power through the grids across thousands of kilometers, which make it senseless to integrate them. 

Thus, the isolated energy districts in the Far East will remain as they are and they will develop according to their own norms.

At the same time, a partial integration of the systems is possible. There are three isolated power districts in Yakutia. The energy bridge project, developed in "Magadanenergo", presents a plan of connecting the isolated Chaun-Bilibino power region of Chukotka to the energy system in Kolyma. There is going to be a power deficit in the region after the shutdown of Bilibinskaya nuclear power station. There is a certain economic sense in maintaining this project; however it is not a cheap one.

- What level of funds do you need for the implementation of the whole program of "RAO ES of the East"?

- This will depend on the ability to raise funds and to ensure their repayment. This is the basis according to which we will define and endorse the highest priority projects of modernization of existing and the creation of new power capacities and heat distribution networks before the state authorities and the "RusHydro" board of directors. Probably some projects will be financed by the federal budget funds, but in general we plan to apply a business-oriented approach towards the planning of new financial models to support new construction projects.

A key prerequisite for the implementation of the projects is their cost-effectiveness; the fact that they have a longer payback period than in the European part of Russia doesn’t matter. They all should generate the needed amount of gross revenue that can cover the costs of construction even within the longer terms. Unfortunately it is very hard to guarantee such stable cash flows in the present-day conditions of total tariff regulation in the Far East. The local tariff rates are based on social, and not economic terms, which do not presuppose any talk of the investment return. It is almost impossible to start new projects or to attract investors - especially from abroad - under these conditions.

The power output ratio of the Far East region economy is 0.43 person per kilowatt, which is 22% lower than in the regional centers in other parts of Russia, the Urals and Siberia, for example.  A total length of transmission lines compared to the size of population is 2.4 times higher. Therefore, this macro-region is invariably in a disadvantageous situation. At the same time, the tariffs here are 100% adjustable - but we can’t calculate any guaranteed future profitability in this case. Without solving this problem the investment returns in any projects in the Far East remain questionable. So the first thing to do here is to introduce a change of the tariff system in the Far Eastern Federal District. We must switch to  long-term tariff regulation. Otherwise we shall have to develop the power industry of the Far East  with state investment alone

A striking example of a direct investment in our industry was visualized with the 50 billion rubles state budget investment, which were transferred to the funds of our parent company - "RusHydro" – to support the construction of four new thermal power plants. Construction sites in Yakutsk, Blagoveshchensk, Sovetskaya Gavan and Sakhalin that we run jointly are good examples of partnership with the state.

- Do the authorities hear you?

- In general, we understand each other. Still, the suggestion of the Ministry of Energy on a gradual increase in tariffs with fixed indexation of up to five years in term will not change the situation greatly. It is necessary to “lock”  the tariffs for 20 years minimum.

Moreover, some projects could be constructed with the help of long-term contracts for the power supply; they have proved their effectiveness in the market price zones. Another option is the conclusion of direct contracts with large customers based on a "take or pay" principle.

- What about export-oriented projects?

-  Here we have the following ideology. For us, the first priority is to meet the needs of domestic consumers. Secondly, neither "RusHydro" nor "RAO ES of the East" are involved in the direct export of electricity. This is a business venture of the "Inter RAO" holding company. We are ready to work in partnership. Nowadays the surplus of power not needed by the domestic market is exported. But the potential of exports is very high: up to 6 billion kilowatt per hour annually. According to our estimates the electricity consumption in the UES of the East can increase from the current 32 to 38 billion kW per hour in a year by 2020. Given the fact that we need to reserve some of the power, a maximum volume of export by 2018 from this energy system may amount for only 4.9 billion kW per hour. In other words, a lack of power generation capacity will slow down the export increase in the future, at least in the unified energy system of the East. It will be essential to invest in the modernization of the existing capacities and to create special export-oriented stations.

-  Obviously, there are no such risks for the energy bridge project that would connect Sakhalin and Japan?

- Yes, this is a purely export –oriented project, fully connected with the energy system of Sakhalin. At the first stages, we could supply up to 500 MW per year via underwater cable. This is not much, of course, but all power supplies needed for the implementation of this export project could be produced on the island - with full completion of the second and third stages of the new Sakhalin CDPS-2. But to enable supply capacity growth for up to 2-4 GWt per year it is essential not only to construct a major export-oriented power station on the island, but also to connect the isolated energy system of Sakhalin with the mainland.

- "RAO ES of the East" actively works on establishing partnerships with foreign companies, particularly Asian ones. What do you aspire for?

- First of all, we are interested in a technological partnership. Companies from the Asia-Pacific region have a variety of competences and produce a wide range of power equipment. Of course, cooperation with  Russian manufacturers will always be a priority to us, as we are a Russian state company. But in general, in this regard we are open to the world. We have a particular interest in technology partnership in projects, where  renewable energy is concerned - unfortunately, most equipment items that are in use in this sphere are not produced in Russia.

In addition, we are interested in attracting Asian funding, apart from other sources. Thus, the "Vostochnaya" TPS in Vladivostok is currently under construction thanks to the loan from the European Bank for Reconstruction and Development and the European Investment Bank. This is a unique deal, deemed the best one in the energy sector in Central and Eastern Europe. The structure of cooperation can be very different, but the basic approach is always focused on the economic efficiency.

- What do you expect from the Eastern Economic Forum?

- The Russian President has said that the development of the Far East is a national project for the entire XXIst century. Without the power industry this national project cannot be implemented. We are ready to meet all challenges that face our industry and we hope that the forum will help us to cope with this task best of all.