Putin tells energy firm to lift investment 900% as gas shortages loom

· Russian power group says prices being kept too low
· EU concerned supplies to west will be squeezed

David Gow in Moscow
Friday November 24, 2006
The Guardian


Vladimir Putin is pushing Russia's main electricity producer, UES (Unified Energy System), to increase its investment in power plants more than tenfold over the next decade to meet soaring demand.

It comes as growing internal shortages raise fresh doubts over the Russian president's repeated pledge to guarantee security of gas supplies to the EU.

Russia exports a third of its gas, taking advantage of higher prices in the west, but its increasingly frequent shortages are being heightened by the country's rapid economic recovery. EU leaders, who are to meet Mr Putin at a summit in Helsinki today, are keen to ensure supplies from Russia are not disrupted, as happened with supplies to Ukraine this year.

Critics say Mr Putin has exacerbated the supply shortages by refusing to raise natural gas prices at home. Rises have been demanded by UES and Gazprom, Russia's main producer, to stimulate domestic and overseas investment in inadequate energy infrastructure.
UES, headed by Anatoly Chubais, a former deputy premier who drew up the 1998 reform plans for the sector, has committed to invest £43bn over five years to 2010 to install 23 gigawatts of new capacity. In the following five years the plan is to build a further 43GW of capacity.

Mr Chubais says his group needs to build tens, if not hundreds, of gas turbine plants to modernise the power system and save up to 35% of gas consumption. But in the past two years it has developed only a fraction of new capacity.

Mr Putin, who chided the sector this week for failing to prevent power shortages, is pressing the industry to speed up investment and build 30GW of new capacity in the first five years and a further 70GW in the following five. Demand for power is expanding much more quickly than expected - it is now increasing by 4.6% a year, according to Mr Chubais, and touching up to 10% in high-growth areas.

Mr Chubais, who met Mr Putin with Gazprom's head Alexei Miller at the Kremlin on Wednesday, said he planned to fund the investment programme partly by a series of initial public offerings in UES's six wholesale generating companies and 14 territorial generating companies. He wants to raise $10bn (£5.2bn) in the next two years, some from overseas, including in London, and said: "My smell of the market indicates it could be $20bn."

This month one wholesale generating company, OGK-5, sold off 14% of its equity to raise $459m. It attracted Russian and foreign investors including the European Bank for Reconstruction and Development, the Finnish energy group Fortum and Gazprom. UES officials said the group's investment bankers advised it against handing the entire block to Gazprom or any other strategic investor.

But Mr Chubais says he is in talks with Italy's Enel, which operates the St Petersburg plant, Germany's Eon, America's AES and others about taking strategic stakes of 25% in up to four of the 20 generating companies on offer and can envisage them eventually taking majority control.

A key element of his strategy in attracting investors is to persuade Mr Putin to raise domestic prices, which are now $45 per 1,000 cubic meters compared with more than $200 in the EU.

Mr Chubais argues that prices should double. "The gas deficit already exists and in the next few years it will grow sharply unless we have a change of policy," he said. Pressed by his advisers to triple domestic gas prices over the next five years, Mr Putin has held out against any such commitment before the 2008 elections.

http://www.guardian.co.uk/russia/article/0,,1955968,00.html