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. Last Updated: 07/27/2016

European Utilities Eye Russian Power

European utilities are ready to make strategic investments in Russian power firms if electricity prices rise, said Manfred Wiegand, head of global utilities at PricewaterhouseCoopers.

"The Russian market is certainly of interest to European utilities," Wiegand said Friday in an interview in Moscow.

The domestic electricity sector, known for its aging grid and generation facilities, could become a "shrewd investment" for European utilities as a host of domestic power firms line up to offer shares, he said.

On Thursday, Italy's Enel said it planned to invest $2.4 billion in acquiring Russian electricity and gas assets.

After a decade of lukewarm interest, Enel would become the first European utility after Finland's Fortum to put serious cash in Russian electricity.

Troika Dialog said it expected Enel to invest in a stake in one of the country's five wholesale retail firms.

State-controlled utility Unified Energy Systems plans to offer investors stakes in five wholesale and several of the country's territorial power generation companies in the next two to three years.

From a strategic investor viewpoint, European utilities would likely acquire "significant" stakes of more than 10 percent in Russian power firms to give them a say in the way they are run, said David Gray, a partner at PricewaterhouseCoopers in Moscow working on energy, utilities and mining.

Gazprom is also likely to gain stakes in European utilities that sell electricity to the end consumer, Wiegand said. Despite political caution, "the legal structure is not there to stop Gazprom" buying stakes in European utilities, he said.

Half of Europe's utilities currently expect gas shortages or supply interruptions, according to PwC's 2006 annual survey of energy company CEOs. Given the supply uncertainty, European utilities are actively seeking to expand and diversify their fuel and country portfolio, Wiegand said.

"We are on the verge of making a lot of these investment decisions," Wiegand said. "Companies that are investing in gas and coal are also considering investing in nuclear power plants."

In Russia, the recent liberalization of wholesale electricity prices could "transform the economics" of power companies, Gray said. As prices for corporate consumers are freed up, higher prices for domestic users cannot be far behind, he said.

The risk with introducing market principles into the power sector is that Russia has few traders with knowledge of how to complete electricity contracts and work with a flexible price environment, Gray said. And yet, mistakes in trading would mean a collapse in profits, he said.

Independent experts noted that the possibility to build or invest in a power plant in Russia has existed for several years now, but drew little enthusiasm from foreign utilities due to fixed prices and the vast sums needed to modernize the country's generation and grid facilities.

Enel are either "bluffing or they are insane," said Gianguido Piani, an Italy-based expert on Russian electricity.

Piani noted that in 2002 Germany's E.On made a pre-feasibility study for a 900-Megawatt combined cycle gas turbine plant in the Tula region, but soon dropped their plans, seeing it as economically unviable.

"With the elections coming up, I can't see the price for consumers rising," said Derek Weaving, a London-based energy analyst.

In the electricity sector, "shareholders in Russia have not been getting a return on equity," Weaving said. While utility majors have circled Russia for over a decade, "the watershed year is when consumers start to pay real prices" for electricity, he said.