RUSSIA: WINTER POWER SHORTAGES EXPECTED

C O N F I D E N T I A L MOSCOW 012572

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STATE FOR EUR/RUS; EB/ESC
DOE FOR HARBERT
DOC FOR 4231/IEP/EUR/JBROUGHER
NSC FOR GRAHAM AND MCKIBBEN

E.O. 12958: DECL: 11/16/2016
TAGS: ECON EIND ENRG PREL RS
SUBJECT: RUSSIA: WINTER POWER SHORTAGES EXPECTED

REF: MOSCOW 12261

Classified By: Econ M/C Quanrud by reason 1.4 (b) and (d).


1. (C) Summary. Government officials and industry analysts
are expecting power shortages in Russia this winter as
electricity consumption growth strains the existing power
infrastructure. UES Head Chubays has warned GOR officials
all year about looming electricity shortfalls. UES is
considering incentive schemes to decrease burdens on the
power system this winter, such as paying businesses for
reducing electricity use during peak hours. In 16 regions,
UES officials are also working with authorities to identify

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businesses that may be subjected to power interruptions
during capacity shortages. Despite being the largest
domestic consumer of gas, UES is also pushing the GOR to
raise domestic gas prices to stimulate more longer term
supply. In a worst case scenario, unexpected equipment
failures and fuel supply disruptions could lead to widespread
and prolonged outages throughout the country this winter. End
summary.


2. (SBU) Last winter, extreme cold weather forced the
electricity monopoly, RAO UES, to disrupt power supplies to a
number of businesses in Moscow City, St. Petersburg, and
Tyumen region. During peak periods, electricity demand in
these regions exceeded previously recorded maximums by 24,
10, and 15 percent, respectively. According to UES
officials, electricity demand this year grew faster than
expected at 4.8 percent - more than double last year's
growth.


3. (C) UES Head Chubays has been warning GOR officials all
year about looming electricity shortfalls. This summer, on
the anniversary of the May 2005 Chagino blackout in Moscow
when one third of the city was left without electricity for a
day, he told the press that large cities faced summer power
shortages because of widespread usage of air conditioning
equipment. (Comment: According to UES Head of Strategy,
Alexey Kachay, summer peak loads are new phenomena in Russia.
In the past, UES experienced peak loads only during winter
months.) On October 12, Chubays warned that Russia would
switch from being a net exporter of electricity to a net
importer this winter. While he assured foreign consumers
that all supply contracts would be honored, he noted that
domestic needs would curtail any increases in foreign power
exports.

UES GEARING UP FOR WINTER

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4. (SBU) UES and regional authorities are busy undertaking
preparations for the peak winter months. According to
Kachay, Chubays chairs an internal task force that meets
regularly to trouble shoot and solve potential problems for
the upcoming months. UES is also considering incentive
schemes to decrease peak load burdens on the power system
this winter. Under one plan, UES would pay businesses for
reducing electricity use during peak hours. Kachay said that
peak hours are usually at ten in the morning and five in the
evening. Businesses would receive four to five rubles for
every kilowatt hour not used during these periods.


5. (C) As a result of expected shortages, UES has also
identified 16 regional power systems that will likely face
interruptions and scheduled blackouts this winter. UES
officials are working with regional authorities to list
businesses that may be subjected to power interruptions in
the event of capacity shortages. In addition to the three
regions affected last winter, UES has added; Moscow oblast,
Leningrad, Komi, Vologda, Kuban, Tuva, Karelia, Dagestan,
Sverdlovsk, Perm, Chelyabinsk, Ulyanovsk, Saratov,
Nizhnygorod, and Arkangelsk regions. According to Kachay,
rapid economic growth in these regions is driving electricity
demand beyond the capacity of their power infrastructure.
(Comment: Retail trade in these 16 regions has grown 17
percent on average in the first nine months of 2006, compared
to the Federation average of 12 percent, according to
official statistics. End comment.)

BEYOND THIS WINTER
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6. (C) Chubays has managed to push through key components of
his power sector reform this year that could increase
investment into upgrading and expanding both the power
generating and distribution networks over the next few years.
Early this year, he won government approval for additional
share offerings for his restructured power companies, the
Wholesale Generating Companies (WGC) and the Territorial
Generating Companies (TGC) to raise much needed investment
capital. According to press reports, UES plans to raise up
to $12 billion over the next two years in public offerings.
In November, the first public offering for 14.4 percent of
Wholesale Generating Company 5 (WGC-5) raised $459 million.
(see reftel)


7. (C) Despite being the largest domestic consumer of gas,
UES is pushing the GOR to raise domestic gas prices to

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stimulate more longer term supply. Press reports indicate
that 70 percent of UES's power plants are gas-fueled with
another 25 percent powered by coal. Last winter, gas
shortages forced UES to switch to fuel oil, or "mazut", which
is two-to-three times more expensive than gas. According to
Chubays, a domestic price for gas at $185 per thousand cubic
meters (tcm) would still be cheaper than the current cost of
fuel oil as a substitute fuel. In early November, Chubays and
Gazprom CEO Miller jointly announced their support for
increasing domestic gas prices for industrial consumers from
$45 to $80 tcm next year to meet the growing domestic demand
for gas. According to the MEDT's 2007-09 macroeconomic
forecast, the Federal Tariff Service is scheduled to increase
gas prices for industrial consumers by 15 percent in 2007.
(Comment: Government officials and industry experts expect
gas prices will increase by more than 15 percent next year.
End comment.)

COMMENT
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8. (C) A combination of extreme weather, an aging power
infrastructure under stress, and fuel shortages will
determine the extent of power disruptions in the coming
months. A severe winter this year, in a best case scenario,
could lead to controlled blackouts in some of the planned 16
regions. In the worst case, unexpected equipment failures and
fuel supply disruptions could lead to widespread and
prolonged outages throughout the country. On gas prices, the
GOR continues to wrestle over a difficult and sensitive
decision. On one hand, higher prices for both gas and
electricity are a key component to reform and necessary to
attract the private investment into these sectors. On the
other hand, the rapid rise of utility prices have been a
source of social dissatisfaction in the past and political
considerations are likely to take center stage as the
election cycle begins next year. President Putin had agreed
to convene a government meeting to discuss the issue of
higher gas prices, but has twice postponed it. According to
the press, the meeting is scheduled to take place November

22. End comment.
BURNS