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. Last Updated: 07/27/2016

Cabinet Cuts Back Electricity Program

The government will cut the investment program for state-run power companies by 40 percent this year, Energy Minister Sergei Shmatko said Thursday.

The investment program had been worth about 900 billion rubles ($26 billion), and the cut, brought on by the economic crisis, marks a rollback on the government's plans to boost electricity output, which is needed to power the economy.

Shmatko spoke after a Cabinet meeting where Prime Minister Vladimir Putin said 2 gigawatts of new capacity would be built per year for the next three years. The plan had been to build 3.6 gigawatts of capacity, both state-run and private, this year.

Putin said 1.8 trillion rubles would be spent by state-run companies on construction over the next three years, compared to 2.1 trillion rubles previously.

The government has decided to cut the investment program by 40 percent compared to what the companies sought in August, Shmatko said.

Companies have already pledged to cut costs by 14 percent this year, Shmatko said. "I think the potential is much bigger," he said.

The schedule to build new generating capacity by companies with state involvement will remain largely unchanged compared to last year, Shmatko said. "No surprises are expected here," he said.

The government will allow the companies to delay the completion of some projects, Shmatko said.

The head of the Energy Development Foundation, Sergei Pikin, estimated that 1.6 gigawatts of capacity would be delayed until next year.

The government will support electricity generators and grid companies where it has shares, Shmatko said. MRSK Holding company will receive 18 billion rubles worth of state guarantees for bank loans to cover its investment plan, Shmatko said.

Unified Energy Systems of the East said the government has asked it to cut its investment program this year due to a lack of state funds, its deputy chief executive Dmitry Selyutin said on the sidelines of an industry conference Thursday. "As a result, our program is almost halved to 17 billion rubles," he said.

Selyutin said his company would delay the construction of a power station in Ussuriisk and the modernization of electricity grids in Vladivostok, among other changes.

RusHydro, the state-run company that manages all the hydropower stations in the country, had its investment program cut by 45 percent to 65 billion rubles this year, said the company's acting chairman, Vasily Zubakin.

"A restoration of steady economic growth is impossible without the development of the electricity sector," Putin said at the government meeting, which focused on the electricity industry.

He said a drop in demand for power consumption was temporary.

Power demand fell almost 8 percent in January and 5 percent in February and it is expected to fall between 4.5 percent and 9 percent for the whole year. A drop in demand by 4.5 percent would still leave consumption at the robust 2007 level, Shmatko said.

Shmatko said on the sidelines of the industry conference that the government would discuss the situation with the private companies "soon."

After the Cabinet meeting, Shmatko said the Energy Ministry would analyze the performance of private companies in a report to the Cabinet this month before making any decisions about changing the investment programs that came with their privatizations. The state will make sure that the companies use the 448 billion rubles, which they raised through share offerings, to boost capacity, he said. "Use of this money to resolve financial problems linked to the crisis, rather than construction, must be ruled out," Shmatko said.

European energy giants and domestic companies spent about 900 billion rubles ($27 billion) to buy assets in the country's electricity sector. A government plan requires investors to spend 11.6 trillion rubles to create 186 gigawatts of new capacity through 2020, with severe fines for those that do not meet the deadlines.

The state will support both private and state-owned power companies equally, Deputy Prime Minister Igor Sechin said Dec. 22.

A meeting on private companies' problems has been delayed repeatedly in the last week, said Igor Mironov, head of the Council of Electricity Producers and Strategic Investors. "The meeting chaired by Deputy Prime Minister Igor Shuvalov was scheduled for Friday, then delayed until Monday, then Wednesday and now indefinitely," Mironov said.