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21 Jul, 2009 10:16

Tariffs place pressure on electricity generators

Under a state decision, gas tariffs will grow twice as fast as electricity next year. The lower revenues of power producers may threaten their multi-million investment programs.

The Russian government is limiting energy tariffs over the next two years as part of its anti-crisis measures. But some sectors will take a bigger hit.

While gas prices will grow by 26% – one percent less than previously planned – power generators will be allowed to boost their prices by only 13 % – and not the expected 22%.

Mikhail Slobodin, the Head of one of Russia’s largest electricity generators, KES Holding, says he hopes other costs remain the same, as higher fuel prices could undermine their new capacity investment program.

“It won’t help to increase our income, our profit, to increase our capability to invest more money. Because 50% of our investment should be the money that we raise from our own sources and of course it’s not good news for investors.”

Experts say energy companies may lose up to $16 billion in revenues as a result of the tariff regulation. Dmitry Skryabin, analyst at VTB Capital says some power generators may face unbearably high fuel bills next year.

“The pace of gas tariff increase was set three times higher compared to electricity tariff increase. This means that generating companies and first of all companies that work on gas will continue working in a margin squeezing environment for the next three years. And I’m afraid some of them may face problems with payments for fuel.”

But power generators hope market liberalization will ride to the rescue. Starting from July – 50% of electricity volumes may by sold at higher free market prices – and that's expected to rise by the end of the year.