Fortum's gigantic investment in Russia facing challenging times

Use of lignite as a raw material may be developed for electricity generating plants

print this

By Susanna Niinivaara in Chelyabinsk
     
      Steam rises from huge cooling towers into the mild winter air over Chelyabinsk, a city of just over 1 million inhabitants nestled behind the Ural Mountains.
      Electricity is being produced here in a huge Finnish investment in Russian infrastructure, at one of the power stations owned by regional electricity utility TGC-10, acquired in the spring by Fortum.
     
Fortum bid some EUR 2.5 billion at auction for the Russian power stations, with around half of this being put towards improving efficiency and building more capacity.
      In March, the equation still looked to be a quite attractive one: Russia had promised to deregulate electricity prices by 2011, suggesting decent dividends were in prospect for suppliers.
      The Russian economy was growing by leaps and bounds, and the growth required large inputs of electricity.
      In the Urals region, where Fortum’s power stations are located, the growth prospects were believed to be especially promising.
     
Fortum’s acquisition produces electricity for the oil and gas sector and in Chelyabinsk particularly for the heavy metals industry - including a metallurgical combinate, a tractor plant, an electrode plant, and a tube rolling mill - that dominates the city’s economy. Now the outlook for both these business sectors does not look anything like as rosy as it did just six months ago.
      Russian companies have appealed to the highest levels of the leadership in Moscow, urging that the liberation of the market, which would bring a direct increase in the wholesale and retail cost of electricity, should now be postponed because of the economic downturn.
     
Even so, Fortum’s belief in the deal is unshaken. “We are here to stay”, says Fortum SVP Tapio Kuula in Chelyabinsk.
      Kuula says he understood the significant impact the economic crisis was likely to have on Russia in August. Now he uses the term "recession" without much hesitation.
      But, he goes on, this is “just one cycle” in Russia, and after it has been weathered, the demand for electricity will turn upwards once more.
     
And Fortum are firm believers that Russian President Dmitri Medvedev and the country's Prime Minister Vladimir Putin will stick to their side of the bargain that the deregulation of electricity tsariffs will go ahead as scheduled.
      Next year the intention is that already half of the electricity sold will be at market prices, and Fortum should be generating 100% market-priced electricity here by 2011.
      The Fortum President and CEO Mikael Lilius has further been making sure things go as planned on the personal level.
      He knows Anatoli Chubais personally and very well, and has put out feelers in his direction. Chubais is the former head of the state-owned electrical power monopoly RAO Unified Energy System, and the personification of electricity reform and privatisation policies in Russia through his work in the Yeltsin administration in the 1990s.
      Lilius has also “bumped into” President Medvedev on a few occasions.
     
The Fortum deal in Russia has been subjected to criticism from the outset: the price was thought to be rather steep, and the power plants old and creaking. Foreign operators in the energy business in Russia have also often run into unforeseen difficulties.
      Natural gas is used almost exclusively as the raw material for electricity generation, and the taps in this case are operated by the giant Gazprom.
      And in the West, people have got used to the idea of treating Gazprom with a certain degree of suspicion.
     
The Deputy Governor of the Chelyabinsk Oblast [Province] Vladimir Dyatlov has now opened discussions with Fortum on the possibility of increasing the use of brown coal or lignite in electricity production.
      “We met [with the Fortum representatives] last week and agreed that we would set up a working party to look into the project. From an environmental point of view it is better to use natural gas, but when we look at the big picture as a whole, in other words ecology, the economy, and the creation of jobs over the next five years, then we and Fortum find agreement on the fact that the future prospects lie with coal”, says Dyatlov.
      Three of TGC-10's power plants are already using coal in addition to natural gas.
     
Fortum’s Kuula take a more cautious view of lignite than Vladimir Dyatlov.
      “Both parties would stand to benefit from a situation where we could get a longer-term vision, both for them in terms of production and for us in terms of use. We have not specifically spoken about increasing the use of coal, but from our side we have been looking for flexible solutions, so that we can get a more long-term framework agreement about what sort of coal would be available to us”, says the Finnish executive.
      Fortum’s less-than-proactive stance is understandable. Greenhouse gas emissions from coal or lignite would be greater than those for natural gas.
     
Helsingin Sanomat / First published in print 13.12.2008

More on this subject:
 Kuula will not speculate on pain threshold in Fortum's Russian operations
 Jobs are at risk here, too

Previously in HS International Edition:
  Fortum buys electric utility in Russia (29.2.2008)

Links:
  Fortum
  Press Release: Fortum discusses its capital expenditure and increases TGC-10 efficiency improvement target in Capital Markets Day

SUSANNA NIINIVAARA / Helsingin Sanomat
susanna.niinivaara@hs.fi