The power balance in the region

The collapse of the Soviet economy has reduced the industrial output in Russia, while the tariff policy has preserved the power industry on the 1990 level. The result is a substantial surplus capacity of electricity.

In the current situation it is possible to take one or two of the oldest reactor out of operation, without any substitution by new production capacity.

About 60 % of the power production in Northwest Russia comes from Leningrad and Kola NPP. The other main sources are CHP (mainly gas) and hydro power. For Russia as a whole, the nuclear share is 13 %.

The big industrial complexes are the main consumers of power. In Murmansk oblast the five biggest enterprises (smelters, mining industry) consume 63% of the power. In Karelia the situation is similar, with pulp and paper industry and aluminium factories as the biggest power consumers. In St. Petersburg, the consumption pattern is more diverse. The private households' share of the power consumption is only around 10 %.

A characteristic feature of the electricity consumption in Russia in general, and in the north-western part of the country in particular, is that the level of consumption depends on the development of a few industrial complexes.

The soviet industry benefited from low energy prices. After the collapse of the Soviet Union, in the period from 1990 up to 1998, energy costs gradually became a heavy burden for the industry. Much of the electricity was either never paid for or paid for trough barter agreements. The devaluation of the rouble in the autumn 1998 substantially changed the situation for the Russian industry. Deflation tripled the purchasing power of the US dollar. With the export income in foreign currency and the expenses in roubles, much of the industry once again found that energy costs became insignificant. More over, the industries catering for the internal marked improved as a result of increasing prices on imported goods. After 1998, the new management of RAO "UES of Russia", Russia's biggest power company, managed to reduce the non-payment and barter payment. Today practical all electricity bills are paid on time and in cash.

The fate of the power demand in Northwest Russia is in the hands of the export oriented power consuming industries. The well being of each of these few industrial complexes, is much more important than any general economical growth rate in the Russian economy as such. The level of electricity consumption will therefore mostly dependent on the development of the international market, and the ability of Russia to compete on this marked.

After 1990, has the electricity consumption in the industry has continuously decreased. Even during the "golden years" for industry, following the deflation in 1998, when industry worked under optimal conditions, industrial consumption of electricity did not increase. Nowadays the regions' industrial complexes face more difficult times with increasing electricity tariffs. We do not expect to see fast and large changes in the short future, but the general conditions indicate reduced power consumption.

Nuclear power is the dominant power source in Northwest Russia. In Russia as a whole, nuclear power constitutes just above 10 % while in Northwest, it represent 60 % of the electricity production. There are two nuclear plants in the region. Leningrad nuclear power plant is located in Sosnovyj Bor, 80 km from St. Petersburg on the south side of the Finish Gulf. It consists of four 1000 MW RBMK- reactors (Chernobyl type). Two of the reactors are of the first generation and the oldest reached its designed 30 years lifetime in 2003. Kola NPP is a much smaller plant, with four 440 MW VVER reactors. Here too, two reactors are first generation and the oldest reached 30 year of designed lifetime in 2003.

Russian cities have widely developed district-heating systems. Some of the heating plants are combined heat and power plants (CHP). This provides for an optimal utilisation of fuel, since the thermal losses from the electricity production are utilized in the district heating system. In St. Petersburg and Petrozavodsk, where gas pipelines exists, the CHP plants use natural gas. In Murmansk oblast, the two CHP plants use coal. In Leningrad region there is one big power-only plant fuelled by heavy oil, which is used to provide peak and reserve capacity.

In addition, all three regions have hydropower, of increasingly importance from south to north. In Murmansk, hydropower covers 50 % of the electricity consumption.

Reduced power demand since 1990 has not been reflected in production capacity. The existing tariff structure has preserved the capacity of the power industry on the 1990 level. The tariffs are based on a cost-plus approach, giving the power plants the opportunity to include all their operation costs before they ad the return on capital. The desire to keep the surplus capacity has lead to cross subsidising, where money are taken from the most cost-effective plants and given to the most ineffective power plants.

The tariff policy has made it possible for the power plants to ignore the market signals when the consumption has fallen with 30 % (1). As a result, the pre-1990 structure from the Soviet times is preserved. The result is a huge over-capacity in the power sector.

The Russian economy is very energy intensive. For every unit of GNP, energy consumption is 3-4 times higher than the average in Western Europe. After 1990, the production of consumer goods fell more than the production of raw materials. In many sectors, the pre-1990 production capacity is maintained, while the output is reduced. The energy consumption of the plants has fallen less than the production, which has resulted in further increased energy intensity.

With marginalized energy prices after 1998, the interest for energy efficiency measures in the industrial sector fell to zero. However, an expected rise in power prices, along with high energy intensity, makes the industry more inclined to consider energy saving measures. According to official statements, the electricity price will, in the near future, increase to more than 1 rouble/kWh (0,03 USD). If the power prices reach this level, the result will be that the industry looses the advantage that cheap power has given for some years. This makes the establishment of new enterprises less likely, and existing enterprises will be forced to increase their energy efficiency in order to maintain profitability. We also believe that measures taken to improve management and establish quality standards will give energy efficiency as a side effect.
Everybody expects increasing future electricity consumption in Russia

Successful macroeconomic reforms in Russia are expected to result in at least 3 % growth in the electricity demand per annum, with growth in certain regions and market niches significantly higher, and some lower. According to RAO "UES of Russia", existing available generating capacity will decline 3-4 % per annum without substantial refurbishment investment. As a result, they expect a rapidly tightening of reserve margins, an increase of the value of security of supply for key industrial customers, and unregulated prices rising towards what is needed to support investment in new capacity (RAO - Russian power reform).

The economical based prognoses used by politicians to forecast the future power consumption are usually more or less badly founded expectations for a return to 1990 level and a gradual exceeding of this level. However, the crisis has been longer and deeper than predicted by the economic models.

When RAO "UES of Russia", as quoted above, expect the margins to tighten and prices to rise towards the cost of new generating capacity, we would also expect consequences for the level of consumption. Many industries will be forced to reconsider their strategies if power prices of this level will be realised. The alternatives are efficiency or bankruptcy.
Future industrial consumption

During our work with the different scenarios, we have made an attempt to assess the plans and future prospects of the key industrial enterprises in the region (2). This has been a difficult task. All kind of information regarding future plans is considered to be commercial secrets, and the enterprises have been unwilling to say anything about their own assessments.

The material available provides no strong indications of major changes in the structure or operation of the existing enterprises. Several of the existing enterprises have developed plans for modernization of the production. This kind of investments is often followed by expansion of the production. Usually, expansion of production will be compensated by energy efficiency measures, and final power consumption will remain more or less unchanged.

Two major potential power consuming new initiatives are to be found in the region: exploitation of oil and gas in the northern areas and the potential construction of a new aluminium plants.

Exploitation of the oil and gas resources in the Barents Sea could lead to establishment of a whole new industry in Murmansk Oblast. The potential energy consumption of this new industry should not be included in power demand forecasts from two reasons: the timeframe is unclear, and more importantly, this will be an energy industry it selves. If gas is landed gas in Murmansk Oblast, it will introduce a new power source and the new industries are at least expected to be self-sufficient with power.

Constructions of new aluminium plants are under consideration both to the Leningrad NPP and Kola NPP, but so far no concrete plans have been made.

It is not likely that any company would build an aluminium plant on the basis of contracts with power prices high enough to secure allocation of money for the construction of new nuclear reactors. Should this be the case, it would be much more rational to extend production in the existing aluminium plants in Siberia. Due to poor transmission capacity to the more densely populated western part of Russia, this region has lasting surplus capacity from hydro power production and far cheaper power prices than those the NPPs can offer by continuing the exploitation of the oldest reactors.
Private consumption

The private per capita power consumption in Northwest Russia is low compared to Scandinavia. The main explanation is the well-developed Russian district heating system. Russia has traditionally had a rational focus on the use of energy sources, and the use of electrical power for district heating is correctly regarded as a waste of energy quality and generally prohibited. Electric heating in Russia is therefore very rare, but electrical heaters are sometimes used as additional heat source when the district heating fails to deliver enough heat. The hot water consumption is also supplied by the district heating system, not by individual electrical boilers. In areas with natural gas supply, cooking is normally done by gas, while electricity is common in the rest of the region. Living space is substantial lower than in Western Europe, another factor that limits the private electric consumption. The number of electrical household applicants is also low.

We can expect the private electricity consumption in Northwest Russia to increase. The per capita growth can be expected to be higher than general economical growth. The Soviet system has left the households with solutions that gradually will be changed; this result in an increased use of electricity on the expenses of other sources. One example is the gradually increasing number of washing machines, which will reduce total energy consumption but increase the electricity consumption. The reason for this is that the water will be heated by electricity in the machine instead of being tapped from the district heating system.

The expected increase in the private per capita consumption will not make any major differences for the power balance in the region. The main reason for this is that the private consumption today constitutes a marginal proportion (10 %) of the total consumption. The other element is the dramatic demographic changes in the region. The population is expected to decline significantly due to reduced life expectancy, reduced birth rate and emigration out of the region.

The Murmansk Oblast population fell from 1,2 million in 1990 to under 1 million in 2000. The oblast administration expects another 100.000 to leave during the coming ten years. This official forecast is rather optimistic. An alternative forecast expects 300.000 people to leave before 2010, resulting in a total population not more than 600.000. If so the Murmansk Oblast population will be reduced by the half during the 20 years from 1990 to 2010.

The situation in Murmansk might look like an extreme case, but the trend is the same all over the Northwest region. The northern regions used to be attractive to many workers. They came in order to make good money for a period or to join the military. Today, the region has lost most of its attraction as labour market. Few people move into the region, while many moves out. Even more people would probably have liked to leave, but as many lost their savings during the inflation and have nothing to return to at their home places, they are forced to stay.

Even the "second capital" of Russia, St. Petersburg, is witnessing a steep decline in the population. The mortality has increased by 27 % while the birth rate has fallen by 46 %, to 1,0 child per woman, which is the lowest rate in Russia. The population prognosis for St. Petersburg predicts a fall in the population from 4,6 millions in 2001 to 4,0 in 2015. (4)
Electricity price

It is hard to give any estimate for future power demand without knowing the price of the electricity. There are a number of uncertainties connected to the prediction of the future power prices. The electricity tariffs are currently subject to governmental regulations.

One of the major uncertainties is linked to the reorganisation and liberalisation of the power sector. RAO "UES of Russia" is pressing for reforms, but political will to dictate prices is still solid. The political resistance is connected to the general believe that reorganisation means higher prices.

The tariffs are calculated on the cost-plus basis and are finally determined as a result of negotiations between the Federal and Regional Energy Committees and the power producing companies. Throughout the last decade, the Government has used its control over electricity tariffs as one of the instruments to manage inflation and maintain competitiveness of the Russian economy. In practice, social and political factors have had a significant influence on the setting of tariffs.

According to the power industry, this has resulted in significant delays and insufficient tariff increases. In the recent years, growth in tariffs has failed to reflect increases in costs resulting from inflation or to cover various factors such as the cost of capital. Russian power companies claim that they cannot generate sufficient internal cash flow, nor rise the necessary external funding they need to finance necessary large-scale modernisation in the power sector (1).

On the other hand, the current regulatory regime in the power industry keeps all the existing production capacity alive. There is an administrative dispatching of electricity on the wholesale market, while regional monopolies fill this function on the retail level. Together with regulated tariffs, this structure effectively ignores marked signals and undermines incentives to improve efficiency.

The tariff for the consumers is formed by the average from the prime production cost for the "energos" own production capacity, and the price for quantities traded at FOREM. In Murmansk Oblast this leads to a cross subsidising from hydro to nuclear. Prime cost of the Kolenergos hydropower is 10-12 kopek/kWh, while the cost of the power from FOREM (Kola NPP) is more than 30 kopek/kWh (September 2002). Prime cost of power from Kolenergos two CHP plant is higher than the price at FOREM and their production capacity is therefore not utilized. This is the basis for the Regional Energy Commission to set tariffs for most of the ordinary consumers to 51 kopek/kWh (6).

The figures for the power production clearly show how the most expensive production capacities in the regions are reduced according to the falling consumption (see figure 3).

It is also a practice to cross-subsidise in order to finance residential consumers, state organisations and agricultural consumers, at the expenses of industrial consumers.

pb09.gif: Figure 5: Retail electricity tariffs, from Russian Power Reform, page 11Figure 5: Retail electricity tariffs,
from Russian Power Reform, page 11
Stabile consumption expected

The bottom-up approach used in this study show that it is unlikely that the 1990 consumption level will be reached without substantial structural changes and active measures to substitute other energy carriers with electricity. Therefore we assume that the power consumption will remain more or less at the 2000 level, dependent on the world market and local power prices.

Two trends point to a continuous fall in the electricity consumption. One is the current world marked prospects for the relevant industries in the region, while the other higher power prices due to an ageing and increasingly inefficient power industry.

On the other hand, the world markets could recover and potential power sector reforms could lead to more efficient production and a slight increase in consumption.

References:

1. RAO "UES of Russia", 2001, Russian Power Reform: New Business Frontiers
2. Kola Energy Efficiency Center, 2002, Assessment of the energy efficiency potential in the industry in Murmansk Oblast (in Russian)
3. "The Fund for Public Opinion, Agency in Moscow", 2002, as referred in Murmansk media
4. Leontev Center, 2002, Neva News No. 5, May 2002.