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. Last Updated: 07/27/2016

UES Banking on Wasteful Homes

Itar-TassAnatoly Chubais attending the inauguration ceremony of a turbine at a power station in St. Petersburg in November.
With the average electricity bill coming to 300 rubles per month, few people are worried about insulating their windows in the winter or switching off the lights when they go out.

Residents of some regions even face fines if they don't use enough electricity.

And that's the way Unified Energy Systems likes it.

"Clearly, as a large electricity company, we have no real economic incentive in pursuing energy efficiency," said David Herne, board member at UES and head of Halcyon Advisors. "But, formally, we have listed it as a priority."

From heavy machines to household heaters, UES is counting on wastefulness to keep demand high. The demand, in turn, is what is fueling UES's multibillion-dollar drive to expand.

UES says the expansion would be necessary even if users were less wasteful. But a closer look at the facts tells a different story.

Two winters ago, demand for electricity shot up by 4.6 percent as many people kept electric heaters pumping day and night and industrial consumption boomed during unusually cold weather.

No blackouts occurred, and the shortage was slight, with only about 1,000 industrial clients having to cut consumption by 5 percent. But the surge in demand raised fears of a power crisis, and all eyes were on UES to avoid it.

The utility's response was to build. Having boosted its $50 billion investment project to $80 billion in June, UES raised it again in February to $120 billion, all of which is meant for upgrading old equipment and putting new capacity on line -- as much as 70 gigawatts of it, the equivalent of about 15 power stations.

But last winter put a damper on these ostentatious plans. Demand for power actually dropped from December to March by 0.4 percent, and analysts began to wonder whether all this growth was really warranted.

Even after factoring out the effect of a warm winter, demand growth still fell 2 percent short of UES's forecasts, UBS said in a report this week.

The bank said it was "worried" over this development, because the case for investing in the Russian power sector hinges on the belief that demand will continue to surge, in line with the 5 percent growth UES is predicting.

A consensus is building that such growth is unrealistic.

"Really this 5 percent number is somewhat far-fetched. They have inflated it to some extent in order to over-insure themselves," said Alexei Solovyov, electricity analyst at Metropol, a brokerage.

The "insurance" is meant to protect UES from a shortage of investor interest. In order to complete its reform plan, UES must sell off all of its assets and cease to exist by July of next year. Strategic investors would have to lay out billions of dollars to make this possible, and would then have to spend billions more to build up capacity at UES spinoffs -- capacity that may stand idle if demand continues to contract.

People may finally start feeling pressure to streamline electricity use under a government plan to raise prices. This year, state-regulated tariffs for electricity will rise 13 percent, and will continue at a steady clip of around 15 percent per year through 2010, the Economic Development and Trade Ministry said in a proposal presented Thursday at a Cabinet meeting.

For industrial clients, who buy much of their power on the free market, prices will jump 30 percent to 40 percent this year alone, the ministry said in an e-mailed statement.

Even a small price increase could make a major dent in consumption. "In Russia, there are lots of low-hanging fruit in terms of what people can do to increase efficiency. You can get 30 to 40 percent reduction of energy use in a matter of years," said Miles Stump, IFC Russia Sustainable Energy Finance Program, a World Bank affiliate that helps finance efficiency projects.

Just by insulating windows, a process that costs around 2,500 rubles ($100) in Moscow, consumers could save up to 50 percent of the electricity used for local heating, according to UES figures.

Overall, efficiency levels are in a bad state, and the official response sometimes borders on the absurd.

In terms of energy intensity -- a measure of how much power is used to make an average product -- Russia is twice as wasteful as the European Union, and six times more wasteful than Japan, according to UES figures. As Russians began to spend more on new appliances from 2000 to 2004, energy consumption among households grew 84 percent, outpacing demand growth among industrial consumers.

The average capacity allotted to one square meter of living space reached 100 watts, compared with 17 watts in Finland. "Of course you cannot call this growth efficient," said UES spokeswoman Tatyana Melyayeva.

In the far eastern regions, moreover, cutting down on energy is actually against the law.

This bizarre situation arises from the rules of distribution, which parcel out power based on how much a company plans to use. If a warm winter forces the company to fall short of these plans, "serious financial sanctions arise," said Olesya Shaklyeina, spokeswoman for the Far East Energy Company, a UES subsidiary based in Vladivostok.

Last winter, which was the warmest in 126 years, energy use fell short of expectations, so industrial clients in regions like Khabarovsk and Amur were forced to keep the lights on at night, just to make sure they used enough power, said Vladimir Tchouprov, head of the energy unit at Greenpeace Russia.

An accurate metering system, which would measure real usage without guessing at consumers' needs, would make these fines obsolete while saving millions of kilowatt-hours.

But with a price tag of at least $50 each, these meters would be costly to install, and the managers in these regions have grown used to the status quo.

"Of course we charge these fines. How can we go without them? They are built into our laws," said Igor Kalenyuk, deputy director of Khabarovskenergo, a regional utility. He declined to comment further.

At the top of the sector's hierarchy, the tone can be just as hardheaded. "Sure, why not just turn off the lights, sit in the dark for a while?" UES chief Anatoly Chubais said at a recent news conference. "No. That is not our answer. Economizing cannot reverse the pace of growth we're facing. We need to expand."