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A NEW RUSSIAN ENERGY MONOPOLY: FOR BETTER OR FOR WORSE?
12.02.07
MOSCOW. (RIA Novosti economic commentator Vasily Zubkov)


What should we make of the recently announced decision by Gazprom and
Siberian Coal Energy Company (SUEK) to set up a new power generation
champion?
The authorities have both endorsed the transaction and hurried to forecast
a bright outlook for it on the Russian energy market.
The reaction of the business community, however, was more equivocal. On the
one hand, this seems to be a logical final stage in the consolidation of
the industry. On the other hand, a new super giant, especially one
supported by the government, could put an end to all hopes for the
emergence of a competitive environment in the sector, and monopolizing it
instead.
Gazprom and SUEK, which are both large investors in domestic power
generation, have announced plans to merge their generating assets in a
joint venture in which the gas giant will have 50% plus 1 share and the
coal giant 50% minus 1 share. The transaction is expected to be completed
before July. The value of the new company is estimated at $11 billion.
This merger will allow Gazprom to save on gas supply to thermal power
plants by using its "own" coal instead, making it possible to increase or
at least sustain exports. It is no secret that the current Russian gas
output can hardly meet growing domestic demand and honor export
commitments. The new coal business and power generation will be especially
profitable for Gazprom in the next few years, while domestic gas prices –
still regulated by the government – stay far below those of exports.
The Industry and Energy Ministry estimates Russia's gas shortage this year
(given international commitments) at 4.2 billion cu m. By 2010 it could
reach 27.7 billion cu m and by 2015 – 46.6 billion cu m. Meanwhile, Russia
has the world's second largest coal reserves and produces almost 300
million metric tons annually, with a possibility to boost production to 400
million metric tons by 2010 (it produced 426 million metric tons annually
in the late 1980s).
Given all that, the "coal instead of gas" strategy is a logical move
intended to reduce power-generation tensions during the "gas break." First
Deputy Prime Minister Dmitry Medvedev confirmed as much, saying "The new
company will allow us to balance the use of coal and gas in power
generation."
Yet many are concerned about the government's overly enthusiastic
endorsement of the new giant and, at times, its direct management. After
all, it is all about the emergence of a new large monopoly with advantages
that render all talk of fair competition irrelevant.
What is domestic power generators' attitude to the initiative? RAO UES is
also striving for diversification. The holding confirms that at present,
coal accounts for 25.9% of its energy and gas for 70.6%. By 2010, the ratio
is set to change drastically: 65.6% from coal and 31.1% from gas. It turns
out that electricity produced from coal is cheaper, although coal power
plants are more expensive to build.
The company's CEO, Anatoly Chubais, has repeatedly confirmed the strategy
of moving toward the use of coal. In the last six years, RAO UES has put
into operation only one coal unit, at the Khoronor power plant, with a
capacity of 215 MW. However, in the next five years it intends to put into
operation 2,000 MW worth of coal generation units and another 20,000 MW in
2011-2015.
Obviously, the government, Gazprom and RAO UES agree on the best way out of
the current difficulties: diversification. Why then did Chubais describe
the planned merger as a "big mistake" on the part of the government? That
is a harsh assessment, even if a preliminary one. Perhaps, he does not like
how Gazprom is managed and developed. That is natural: a liberal and market
reformer cannot like the authorities’ growing protection of the gas giant,
its management, lack of transparency, aggressiveness, lack of competition
and many other things.
At the same time, RAO UES’s fears could be assuaged by the possibility that
its multibillion-dollar investment burden to develop Russian power
generation could become significantly lighter as the new company emerges.
It does not just have rich "parents," but also serious ambitions, planning
to become a global major. That's an expensive, but worthy, goal.

The opinions expressed in this article are those of the author and may not
necessarily represent the opinions of the editorial board. –0–