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. Last Updated: 07/27/2016

Wholesale Electricity Prices to Rise 35%

The price of electricity sold on the Federal Wholesale Market of Electricity and Power, or FOREM, will rise 35 percent as of Monday, officials of national power grid Unified Energy Systems said.

The Federal Fuel and Energy Commission approved the hike last week.

However, UES officials said households will not be affected by the hike until the end of summer, adding that the energy giant had been forced to raise prices or become financially unviable.

"Wholesale prices have not been raised since June 1 last year. Without this measure, the company would be operating at a loss, while with the price rise we can probably just about break even," UES spokesman Gennady Yezhov said.

FOREM distributes about a third of the nation's electricity production. FOREM's main function is to redistribute electricity from the areas where excess power is generated to consumers in regions where electricity production is nil or below demand.

A kilowatt of electricity has been selling on FOREM for 16 kopeks (0.56 cents). The national average price for a kilowatt paid by households, meanwhile, stands at 27 kopeks. The increase will mean that as of Monday, electricity from FOREM will be sold for about 22 kopeks per kilowatt.

Yezhov said several factors, ranging from inflation to being tied to gas supplies from another monopoly, Gazprom, have forced UES to make the hike.

Since the last increase, the inflation rate has been about 18 percent, while Gazprom cut its gas supplies to UES in the second quarter of the year started April 1.

"We will have to cover the difference by burning crude, which is five times more expensive," Yezhov said.

UES will be forced to buy an extra 2 million tons of crude in the second quarter to compensate for gas shortages.

Crude across Russia is sold at prices between 1,600 rubles and 3,000 rubles ($56 to $106) per ton, Yezhov said.

A ton of crude is roughly equal to 1,500 cubic meters of gas in power generation. However, the price of 1,500 cubic meters of gas costs only $12 to $21, he said.

Yezhov said the 35 percent hike in FOREM prices should not have a drastic effect on consumer-goods prices.

"Electricity makes up between 3 percent and 10 percent of total costs for industry," he said.

The only exception is the aluminum industry, where electricity can contribute nearly 30 percent of total costs.

Household electricity prices vary by region and are usually based on the costs of both locally produced and imported power.

Most regions' electricity supplies come from a combination of sources, including power purchased from FOREM.

European parts of Russia will feel the affects of the price hike most, said Natalya Sazhina, an analyst with Alfa Bank.

The Kalmykia and Karachayevo-Cherkessia republics and the Kaluga region produce no electricity at all, she said, adding that many other regions in European Russia produce 30 percent or less of the amount of electricity they consume.

Sazhina said local power prices are political issues at least as much as they are economic ones.

"A lot will depend on regional leaders. For example, some of them may be facing elections, so will not risk hiking electricity prices," Sazhina said.

Roland Nash, an economist with Renaissance Capital investment bank, approved the price hike. He said electricity is being sold below cost.

"It is a good move to increase the efficiency of the economy as a whole," Nash said, adding that the pressure to improve efficiency will especially be borne by industrial consumers.