Growth at downturn

March 28, 2014
Published in corporate Gazprom Magazine Issue 3

Gazprom commissioning new capacities in power industry

To lay it on the line, 2013 turned out to be rather an unsuccessful year for the Russian power industry. It was not only due to decreased financial indicators and capitalization of energy companies, but also because many issues crucial for the further development of the energy sector, becoming yet more urgent year by year, had been left unsolved. These include creating a new power market model and mapping out a program for facility retrofitting. Despite the unfavorable market situation and absence of government support, Gazprom by means of managerial decisions keeps maintaining the economic efficiency of its power business and implements a large-scale investment program.

As all the previous scenario forecasts concerning the average annual rate of growth in power consumption for 2013 proved to be far from the real state of things, the “everything is running to plan” statement does not apply to the Russian power industry. Whether it be the Energy Strategy until 2030, the Scheme and Program for the Unified Energy System Development constantly reconsidered by the Ministry of Energy or the Consolidated Balance Forecast of the Federal Tariff Service (FTS) – each of these documents was far too optimistic about the growth in power production and consumption. In reality, both of these interdependent rates declined – by 0.6 per cent in terms of consumption (it totaled 1,031.2 billion kWh) and by 0.8 per cent in terms of generation (with the total of 1,044.9 billion). One of the key reasons for this was a slumping consumer demand on the part of metallurgy and aluminum industry.

Even now it may be stated that the optimistic plans for the current year are also unlikely to be fulfilled – the majority of experts tend to believe that we won’t observe any growth in 2014. Most probably we need to wait for the decrease (in January and February the demand fell by 1.5 per cent, and the generation – by 1 per cent). The flaws in scenario forecasts are far from being theoretic – Russian energy companies look out for them when mapping out their activities. And the price of such flaws is tariff imbalance and the ground for conflicts among the consumers, distribution and generating companies, which in the end lead to growing debt on the consumers’ part and a considerable decline in financial performance of generating companies.

The securities market also clearly signals about the poor state of affairs in the power industry – last year was a failure for the shares of several Russian energy companies. The MICEX index of the Russian power industry dropped by almost 40 per cent, and the securities of Rosseti and Inter RAO lost almost 50 per cent of their original value. One of the main reasons for funds withdrawal pointed out by the investors was unsatisfactory government regulation: ever-changing rules of the game, postponed decisions on the energy reform and the heat market reform, price caps, etc.

Energy economy

Surely, negative trends in the power industry couldn’t bypass Gazprom which owns Gazprom Energoholding, Russia’s power and heat generation major (holding the majority stake in Mosenergo, TGC-1, OGK-2 and MOEK acquired by Gazprom Energoholding in the second half of 2013). At the same time, thanks to the peculiarities of Gazprom’s power facilities location and timely measures, Gazprom’s energy division managed to achieve positive results at year-end. The 2013 revenues of three generating companies – Mosenergo, TGC-1 and OGK-2 under the Russian Accounting Standards (RAS) totaled RUB 333.2 billion, which is by 4.2 per cent more than in 2012. The net profit grew by some 4 per cent to RUB 15.7 billion. Meanwhile, the aggregate EBITDA (under the International Financial Reporting Standards) of these three companies is forecast to increase by almost 14 per cent – from RUB 46.3 billion to RUB 52.7 billion. In addition, the MOEK’s 2013 revenue under RAS reached RUB 96.8 billion. However, it is too early to judge this company’s financial performance in detail – it has joined the Group not long ago.

Gazprom’s energy division managed to achieve positive results at year-end. The 2013 revenues totaled RUB 333.2 billion, which is by 4.2 per cent more than in 2012. The net profit grew by some 4 per cent to RUB 15.7 billion.

Gazprom’s last year power generation performance indicators are comparable to those of 2012 at year-end. It may be explained by the fact that two of three generating companies operate in capital regions (Moscow, Saint Petersburg), where the main consumers are households and small businesses, which, unlike major industries, haven’t reduced their power consumption. Another reason, which is even more important, that Gazprom Energoholding managed to build up its revenues and profit was the cost optimization campaign. In 2012 it provided for saving some RUB 7 billion. Following the last year’s results, the aggregate EBITDA amounted to another RUB 4 billion. Each of the companies implements its own cost optimization program: it is Lean Manufacturing at Mosenergo, Program for Shareholder Value Enhancement at TGC-1, Program for Increase in Operational Efficiency at OGK-2. The names are different, but the aims are the same and as experience shows – they are quite attainable. The present situation at OGK-2 may serve as a bright example. Though the company reduced the scope of power generation compared to 2012, it managed to boost sales revenues by almost one-third and net profit – by 12 per cent. In 2014 Gazprom Energoholding plans to secure the EBITDA economic effect of the cost optimization program at another RUB 2 billion, maintaining the profitability ratios of the generating companies on the 2013 level in the unfavorable power market conditions.

The investment program was also a success last year – both under the Capacity Supply Agreements (CSA) and beyond them. In 2013 Gazprom Energoholding invested some RUB 60 billion into CSA projects, and the major commissioning of power facilities took place at the beginning of the year. In January 2013 a 300 MW power unit No. 7 of the Novocherkassk SDPP (OGK-2) was commissioned after the reconstruction. A steam turbine unit, a generator and a boiler unit were reconstructed. These activities resulted in reducing the specific fuel equivalent consumption of the power unit by more than 20 g/kWh, increasing its capacity from 264 to 300 MW and extending the service life of the turbine unit equipment by 25 years.

In addition, in early 2013 the Adler TPP was commissioned, an advanced thermal power plant with the output of 360 MW (heat output – 227 Gcal/h) composed of two independent PGU-180 combined cycle gas turbine units. Each unit comprises two gas turbines manufactured by Ansaldo Energia (Italy) and a steam turbine manufactured by Kaluga Turbine Works. For instance, earlier this year the Adler TPP secured the reliable uninterrupted power and heat supply to the sports venues during the Olympics and Paralympics in Sochi.

In addition, 2013 saw the completed large-scale reconstruction of the Vuoksa HPP Cascade, the major power source on the Karelian Isthmus, which consists of the Svetogorsk and Lesogorsk hydro power plants. The operations resulted in the technical re-equipment of both plants – eight hydraulic turbine units were replaced and the Cascade capacity was increased by 25 per cent to reach 240 MW.

In 2014 it is planned to invest some RUB 80 billion into CSA projects. One of the major projects which starts this year envisages the construction of the second turbine unit PGU-420 at the Serov SDPP (Sverdlovsk Region). It should be mentioned that previously when RAO UES was devising the investment program, the construction of the similar combined cycle gas turbine unit was supposed at the Stavropol SDPP in the energy-excessive region. However, Gazprom Energoholding and OGK-2 managed to agree with the regulators the issue of relocating the construction to Serov (the Russian Federation Government adopted the relevant Directive in February 2014). There were objective reasons for it – at present power shortage at the Serovsko-Bogoslovsky power distribution hub comes up to at least 700 MW a year. This shortage is covered by almost full loading of the power transmission lines connecting with the Sverdlovsk power system. The new PGU is to resolve the issue of power supply to this industrial area.

Passion according to Troitsk SDPP

Among all other CSA-related projects of OGK-2 where major operations will continue the next year, a special notice should be given to the Troitsk SDPP, where a 660 MW powder fuel unit (PSU-660) unparalleled in Russia is currently under construction. The project activities are complicated by the fact that the Troitsk SDPP which plays a considerable part in supplying electric power to the Chelyabinsk Region, experiencing power shortages, was transferred to Gazprom Group from RAO UES of Russia in a deplorable state. At the point of its passing under Gazprom’s control, 96 per cent of the plant equipment was deteriorated – it is the worst figure among all the Russian SDPPs, though many of them are older than the Troitsk one. On the equipment deterioration scale the production facilities of this SDPP fell under the ‘junk’ category. Therefore, apart from the construction of a new power unit Gazprom’s power engineers had to carry out large-scale modernization of the operational equipment.

A number of the activities carried out have already yielded certain results – for example, soot emissions were decreased tenfold. At the same time, there are still numerous bottlenecks and as it is known, a chain is no stronger than its weakest link, which was confirmed by an accident in late January this year. A part of heat supplying equipment was urgently put under emergency repairs, which caused a non-critical temperature drop in houses and limited hot water supply for several days. Unfortunately, this accident aroused widespread criticism of OGK-2 management by one of the Energy Ministry deputies (Chelyabinsk authorities stated they had no claims against OGK-2), while the Ministry was well aware of all the problems existing at the Troitsk SDPP. At some point Gazprom’s power engineers would appeal to all the possible authorities, all the way to law enforcement bodies, about the deplorable state of the power plant transferred from RAO UES of Russia. And now the OGK-2 management is on the receiving end. As if in Russia numerous accidents with far graver consequences do not regularly happen at power facilities in a much better state than Troitsk SDPP. The Troitsk SDPP didn’t disconnect anyone from heat supply and maintained the heating medium temperature, though certainly in some parts of the city the locals had to put up with serious inconveniences. The attitude of certain Energy Ministry officials is yet more surprising, as for several years already the said agency has been unable to resolve the issue of adopting a capacity modernization program, desired by all power companies well aware of the equipment state at their facilities, who have been striving for it vigorously and for a long time, yet with no result, unfortunately.

According to Denis Fyodorov, Director General of Gazprom Energoholding, “we’ve drawn certain conclusions from this situation and we’ll devise and implement a number of additional measures that will let us pass the next winter more smoothly.” On a large scale, the problem solution is related to the commissioning a new power unit (scheduled for late 2014 – early 2015) that will make it possible to bring out of service the first stage of the plant; and it is possible that a new boiler house will have to be constructed as a standby capacity. In addition, following the decision by Andrey Cherezov, Deputy Head of the Energy Ministry, the operational readiness certificate of the Troitsk SDPP was revoked. According to Denis Fyodorov, in case of complex situations one should not talk a lot of hot air, but make decisions to resolve them.

Mosenergo is also currently implementing a number of major projects – construction of combined cycle gas turbine units with the capacity of 420 MW at CHPP-16 and CHPP-20 as well as 220 MW at CHPP-12. They are to be launched between 2014 and 2015. Moscow CHPP-9 deserves special mentioning. Here it was planned to launch Russia’s first unparalleled gas turbine unit of Russian manufacture (Power Machines Company) with the capacity of 65 MW (GTE-65). Its successful commissioning could have been a certain breakthrough both in Russian power generation and Russian power-plant engineering. Unfortunately, this mission has been impossible so far. “The turbine unit can’t be called either bad or ineffectual,” says Denis Fyodorov. “But even the first test runs showed that this turbine’s place was at the plant’s test facility where all the existing defects and ‘childhood diseases’ peculiar for the pilot model should be brought out, but not at the construction site of the facility built under the CSA.” Bearing in mind that in our country the first step is always troublesome, one can’t but put faith in Russian engineers, who maybe will be able to whip this unit into shape in some time. As for Mosenergo, to which the failure of meeting the schedule of the CSA facility commissioning would bring grave penalties, it had to commission a gas unit based on an imported turbine earlier this spring. The parties resolved the issue amicably: Power Machines took their equipment back and conscientiously returned the money paid for it.

CSA – ‘minus’

Gazprom Energoholding also implements several major projects beyond the CSA. The first one is the construction of the Astrakhan gas turbine CHPP carried out for the purpose of increasing the reliability of power supply and process safety of the Astrakhan Gas Processing Plant, which is the consumer of the first category. The plant designed capacity is planned to reach 150 MW. At present the facility is at the design stage. The start of the on-site operations is scheduled for Q2 2014.

Another project is the construction of a power plant for the Orenburg Helium Plant, for which the construction investment rationale has been prepared and the project feasibility study has been conducted. The final project implementation scheme hasn’t been devised yet.

And, finally, the largest project is the construction of PGU-420 MW in Salavat, where Russia’s largest oil refining and petrochemical industrial complex (Gazprom Neftekhim Salavat) is located. At present construction and installation operations are nearing completion. The facility is to be commissioned in early 2015.

Here, it’s worth mentioning that the investors presently involved in construction projects for large-scale power generation facilities (especially in thermal power industry) beyond the CSA, put their money at high risk due to the ambivalent government policy and the current economic state of the power generation industry. The same applies to capacity upgrading. So, there are not too many volunteers to commission new capacities. Such state of things is disastrous not only for the power generation industry and consumers as a consequence, but also for engineering companies majoring in power plant construction and for power-plant engineering companies. In two or three years all the projects under the CSA will be completed (equipment under the majority of them has already been contracted) and a whole range of companies will be left out of work. If the abovementioned Power Machines start manufacturing high-class gas turbine units, the question arises of who will buy them.

Unfortunately, there are no answers to these questions yet. However, Gazprom, which has entered the power generation industry for the long haul, is going to upgrade the equipment at its power plants, even despite the scope of work being smaller than desired. “We realize,” Denis Fyodorov says, “that we are responsible for gas supply to Moscow, Saint Petersburg and other cities and we think that in some time this work will be widely understood, its investment attractiveness will increase and the decisions to benefit power workers and consumers will be made.”

Nikolai Khrenkov


Expected indicators for 2013 under RAS

Indicator Mosenergo TGC-1 OGK-2
Revenue (RUB billion) 154.1 67.5 111.6
EBITDA* (RUB billion) 24.7 16.5 11.5
Net profit (RUB billion) 8.0 3.2 4.5
Power generation (billion kWh) 58.6 29.3 70.7
Net heat supply (million Gcal) 67.6 27.3 6.8

* Forecast indicator under IFRS