icon bookmark-bicon bookmarkicon cameraicon checkicon chevron downicon chevron lefticon chevron righticon chevron upicon closeicon v-compressicon downloadicon editicon v-expandicon fbicon fileicon filtericon flag ruicon full chevron downicon full chevron lefticon full chevron righticon full chevron upicon gpicon insicon mailicon moveicon-musicicon mutedicon nomutedicon okicon v-pauseicon v-playicon searchicon shareicon sign inicon sign upicon stepbackicon stepforicon swipe downicon tagicon tagsicon tgicon trashicon twicon vkicon yticon wticon fm
17 Nov, 2008 04:58

Power sector reform stalls as cash dries up

OGK-2, one of Russia's largest electricity generators, is asking the government to let it postpone its investment program for at least two years. In the face of the credit crisis, generators are struggling to find the money to finance their investment objects.

When buying into Russia's electricity generation business when the sector was reformed, the new owners undertook investment obligations totalling $ 400 Billion.

Now, many generators can't find the cash to launch their projects. OGK-2 has to start building three large generating plants next year and needs a $2.5 Billion loan to finance construction, according to General Director Stanislav Neveynitsyn.

“We are in negotiations with several banks including state-owned ones. But nobody can provide long-term money now. We ask the energy ministry to postpone  the construction of one of our plants till 2015.”

David Herne, Managing Director of Halcyon Advisers, which manages more than $500 million worth of investment in Russia’s electricity sector, is not surprised and points out that the credit crisis is not solely to blame.

“It’s clear that in some cases the investment obligations, the investment plans, were farcical.  They were manufactured without any deep analysis, costs were just pulled out of thin air, and, not surprisingly, it turns out that the real costs are totally different.”

Generators forecast significant reduction in demand for power next year and are asking to be allowed to postpone construction of new plants.  But David Herne says that to avoid the risk of blackouts as early as next year, investment is crucial.

“Even if demand does not increase, even if it begins to decline slightly – which I actually think is unlikely, but not impossible – we still need new capacity, or at least to maintain the existing capacity.  And that still requires capital expenditure.”

With many big industrial consumers in Russia already tight on cash, the electricity market could also face a massive spate of non-payments.  That could in turn trigger bankruptcy among the electricity retailers who may then be bought by the generators.

Russian Railways to issue infrastructure bonds and take loan

Global manufacturers talk up Russia’s longer term

Gazprom and BASF join forces to turn on Urengoy gas