Gazprom Says Russia Power Investments Hurt by Rates, Prices

OAO Gazprom, Russia’s biggest power investor, said lower-than-expected electricity prices and capacity rates, coupled with expensive loans, are stifling spending on new generation.

“You’re looking at an internal rate of return on projects of 2 percent with the current power prices and capacity rates, while banks want 20 percent on loans,” Denis Fedorov, head of Gazprom’s power assets, told reporters in Moscow today. “How can we invest in new electricity projects?”

The state-run company, the world’s biggest natural gas producer, acquired almost a third of Russia’s power generation capacity last year as the government auctioned plants to finance new power lines and create competition between utilities.

Investors who bought Russian assets in the last two years, including Italy’s Enel SpA (ENEL) and Germany’s E.ON AG utilities, have become concerned that the government will slow a planned liberalization of the industry as demand for electricity slows. The nation’s biggest industrial users, including state-run OAO Rosneft, have lobbied to cap power price growth to help weather the economic crisis.

“The government is at a crossroads,” Dominique Fache, head of Enel’s Russian operations, said today at the Russia Power conference. “You can help the big clients now and keep power cheap, but you will not see any investments in two years time.”

No Slowdown

Energy Minister Sergei Shmatko said yesterday the state isn’t considering slowing the liberalization at present. The state will allow utilities to delay some investments that their owners agreed to make when buying the assets, he said.

Russian power consumption fell 6.7 percent in the first three months of this year compared with a year earlier and 76 billion rubles ($2.3 billion) of bills remain unpaid, according to the ministry’s data. Demand is still growing in the south of Russia and in Moscow, the data show.

“We learned just yesterday that the Moscow city government wants three more power units by 2012, which means we’d need to start work today,” Fedorov said on the sidelines of the power conference. “The question is: How do we finance it? Power plant construction costs haven’t dropped despite the crisis.”

Gazprom has invested 60 billion rubles in building power plants in the last two years and is re-investing all profits into new projects, Fedorov said. Gazprom owns 57 percent of OAO OGK-2, 60 percent of OGK-6, 54 percent of OAO Mosenergo (MSNG), and 46 percent of OAO TGK-1 generators.

The payment Gazprom has been allocated for the new capacity and the level of electricity prices on the day-ahead market are lower than needed to make investments profitable, he said. The situation has put Mosenergo, the main utility in Moscow, in a “difficult financial situation,” Fedorov said.

“Current conditions don’t stimulate investments,” Fedorov said.

To contact the reporter on this story: Yuriy Humber in Moscow at

To contact the editor responsible for this story: Simon Casey at

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