The resisting system prevents Russia from selling electricity to Europe

08.06.2011 — Analysis

In June 2011, the Gazprom Corporation is planning to commence construction of the Altai gas pipeline that will transport natural gas from Yamal to China. At the same time, energy producers offered the Russian government to return to the issue of electric power supplies from Eastern Siberia to Celestial China. Experts think that the committed projects blatantly compete with each other. Gazprom has better chances to win: Chinese consumers prefer not to buy finished products from Russia, opting for raw materials. However, as the "RusBusinessNews" columnist has found it out, the triumph of the gas monopolist implies greater risks and is less attractive to Russia from the strategic perspective.

The Altai gas pipeline worth of 14 billion US dollars is scheduled for construction in the middle of 2011 to be completed in 2015. The contract for gas supply from Siberia to China has not been signed yet, but, according to newspapers, agreement has been reached to supply 30 billion cubic meters annually within 30 years. The commercial part of the project is still under discussion, but executive managers of Gazprom hope that they will be able to come to terms with the Chinese party about prices by mid June.

Experts are not as optimistic as the management of the gas monopoly. Igor Yushkov, an analyst of the National Energy Security Fund, thinks that construction of an expensive gas pipeline to make supplies to the one and only country is quite risky: China, being notorious for its stubbornness in pricing issues, will feel free to dictate its terms and conditions. During the negotiation, the Chinese are likely to intimidate the Russian side, emphasizing the impossibility to close down the deposit (gas pumping) as well as referring to the alternative raw hydrocarbons from Turkmenia, which is extending the pipeline to China. According to I. Yushkov, there is also risk of default. Gas production is going down in Russia, whereas the obligations of Gazprom to consumers are becoming more and more pressing. With the intended implementation of all the committed projects, the monopolist will face the problem of raising money to develop new deposits.

The Russian oil companies, having ignored the existing risks during their implementation of the Eastern Siberia-Pacific Ocean project, have already learnt a rough lesson: China, at its sole discretion, slashed prices for the incoming oil. The Russian side does not want to apply to court; however, there is no other way out in this situation.

Igor Yushkov believes that it is more profitable and less risky to supply electric power to Celestial China rather than hydrocarbons. At the moment, RusHydro, OJSC, is conducting negotiations with the Chinese corporation, Three Gorges, concerning the participation of the latter in upgrading of Sayano-Shushenskaya HPP and electricity supplies from this plant to China. Such cooperation, in the expert's opinion, would have a positive impact on Russia: Due to construction of new networks, Russian companies would be able to receive high-tech orders. Over the last twenty years, the country's electric power system has degraded: Losses have increased from 9 to 12% since the USSR's dissolution.

In the meantime, Andrei Khorshev, head of the laboratory at the Institute of Energy Research at the Russian Academy of Sciences, doubts that the present-day Russian electrical engineering industry is able to build several long-distance direct current transmission lines. The country has no sufficient skilled personnel to do construction and erection operations of such scope within short time. Furthermore, the technology of construction of power units designed for ultra supercritical steam parameters is still unavailable to Russian power engineering companies. As a result, it is more and more frequently said that construction and operation of export-targeted power plants and high-voltage transmission lines will be done by Chinese companies, which gives no benefits to Russia from the strategic perspective.

Therefore, all the plans about electric power supplies to China remain on paper. For example, the General Layout Plan for Electric Power Facilities until 2030, which was approved by the RF government as a whole, provides for construction of new electric power plants operating on local coal in Siberia and the Far East by 2020, assuming the total capacity reaching 10,800 MW; the plants will be targeted solely at electric power exports to China. However, no contracts for supplies have been signed so far.

Sergei Kuimov, the former chief engineer of Irkutskenergo, OJSC, told "RusBusinessNews" that the Russian and Chinese working team that was organized in 1999 and included professionals from the АВВ Concern examined technical feasibility of electric power supplies from Bratsk to Beijing. The experts found no insurmountable obstacles that would prevent implementation of the project; however, the negotiations were discontinued by the Chinese who stated that they had no deficit of electric power.

Vitaly Bushuev, General Director of the Institute of Energy Strategy, says that not long ago the Russian government was offered to revive a number of older projects for electric power supplies from Yakutia and Middle Yenisei to China. At present, the experts are deciding whether the manufacturing of the required equipment should be brought back to life at Russian factories or the equipment should be bought from France. However, this problem is not the main obstacle in electricity exports to China; there is no demand from consumers. Chinese consumers, according to V. Bushuev, are reluctant to buy finished products, electric power being among them.

Experts say that the Chinese side hides skillfully its reluctance behind the talks about the development of the "right" pricing formula for electricity. Alexander Keiko, head of the department at the Institute of Energy Systems at the Siberian Branch of the Russian Academy of Sciences, notes that there is no sense in discussing prices with the Chinese: even if the acceptable agreement is reached, it will be broken unilaterally as it happened to the oil supply contract. When making a decision on supply of energy resources to China, the expert concludes, no economic benefits should be expected.

Pyotr Bartolomey, professor of the Department for Automated Power Systems at the Ural Federal University, thinks that Russia should not dwell on electricity supply to China: There are electric power consumers in Japan and Europe. However, the access to these promising markets is impossible without long-distance transmission of electricity. Today, this problem is being studied by scientists of the European Union and USA, as the industrialized countries intend to take advantage of low-cost energy resources in Africa and South America.

In theoretical terms, Russian scientists solved this problem in the 1960s, minimizing energy losses by using flexible transmission systems that would factor in the ambient temperature, transmitted power, intermediate takeoff, etc. However, then there came the issue about replacement of the older power transmission lines, which were not able to provide smooth mode regulation, and about manufacturing of new control systems - and everything came to a halt. P. Bartolomey, states that Soviet factories were not interested in manufacturing new products, as their executives were accountable only for reaching the output targets set for the older products.

The modernization of the energy system, according to experts, is required not only for electricity exports, but also to supply cheap electric power from Siberia to other Russian regions. The electric power plants in the Urals and in the European part of the country are not able to maintain the network power that is required for steadily operating industrial enterprises. The development level matching the level of the USA and Europe will drive Russia into deficit of electric power. The similar situation was already observed in the 1980s when the network frequency dropped below the critical level.

Specialists think that the quality problem that prevent Russia from working in line with energy systems of other countries can be solved through adopting technologies of long-distance electric power transmission. To get things moving, the industry needs heavy investment. The government, however, postpones the issue of upgrading networks indefinitely, and the business community has no entity that would be interested in addressing this problem.

The latter phenomenon can be explained very simply: technologically, long-distance gas transportation is much easier in comparison with electricity transmission. Therefore, there is no doubt that in the competition between the electricity and gas projects the preference will be given to the raw material option.

Vladimir Terletsky