PRIME: FOCUS: Russian power prices frozen till March in midst of upcoming election
The Russian government is tightening regulation
in the electric power sector in light of the upcoming presidential
elections, having announced that it reached an agreement for power
prices to remain unchanged in January–February. Analysts say the
move is not very significant for the industry, as power prices were
not expected to grow on the free market in early 2012 due to stable
gas prices. The financial results of power producers are unlikely
to be affected much as a result of the government’s decision, but
investor attitude could be worsened towards the sector, analysts
said. It is also unclear as of yet whether this enhanced regulation
will be applied only during the pre-election period or if the
policy will be gradually implemented in hopes of sorting out the
current chaos in the power industry.
The Russian Energy Ministry has agreed with
power producers that electric power prices, including those on the
free market, would stay at the December 2011 level through January
and February of this year, Energy Minister Sergei Shmatko said on
January 20. “We assume that prices for housing and utilities
services, including those for electric power, should remain the
same,” Shmatko said, adding that a pertaining agreement was reached
with guaranteed suppliers and power generating companies. The
minister also called on regional governments to notify the ministry
in case of a growth of power prices for consumers in
January–February.
The majority of surveyed analysts believe that
this decision can be attributed to impending presidential elections
on March 4. “This step is obviously being taken as part of the
pre-election campaign aimed at keeping prices under control until
March,” Alfa-Bank utilities analysts Alexander Kornilov and Elina
Kuliyeva said. They also said it was not clear for them how the
government planned to interfere in the very difficult mechanism of
price formation on the spot market.
Utilities analysts at UralSib Capital said they
believed “the measure is in line with the government’s policy aimed
at strengthening power sector pressure that has been recorded over
the previous year amid preparations for both parliamentary and
presidential elections.”
Meanwhile, Konstantin Reyli, a
senior analyst covering power utilities at investment company
Metropol, said Shmatko’s statement did not contain any news and was
delivered in the context of earlier government decisions. The
Russian government recently approved moving of the annual tariff
indexation from January 1 to July 1. The analyst also noted that
strengthening of regulation in the power sector was outlined
already in early 2011.
Reyli also said he believed prices
on the free market would not be rising at the 2011 level, as gas
prices currently remain at the 2011 level. “Divergence in power
prices for final consumers, namely businesses, as prices for retail
consumers are wholly regulated, could occur only because of
decisions by regional power commissions and because of growing coal
prices,” the analyst also said.
Irina Filatova and Yekaterina Tripoten,
utilities analysts at investment company BCS, also said they did
not expect changes in free power prices in January–March as gas
prices were kept unchanged.
The analysts surveyed were at odds on whether
keeping power prices unchanged in January–February would affect the
business of power generating companies. While Kornilov and Kuliyeva
from Alfa-Bank believe this step can negatively impact power
producers, including hydropower company RusHydro and all thermal
generating companies, some other analysts say that power producers
are unlikely to be significantly affected.
“As gas prices are not growing, the decision to
freeze free market power prices at the December 2011 level for two
months should not lead to a gas thermal power plants margin
decrease in comparison with December 2011 margins,” said Alexander
Kotikov, an analyst covering power utilities at investment company
Troika Dialog. The investment company, however, could lower its
forecasts for the financial results of power generating companies
in January–June, Kotikov said, adding that he hoped power producers
would have the opportunity of compensation for their lost profits
by the end of 2012.
The impact of the price freeze on the financial
results of power generating companies in the first quarter of 2012
is minimal on the whole, Filatova and Tripoten from BCS agreed.
Utilities analysts at UralSib Capital do not
expect the government’s move to significantly worsen the financial
results of generating companies, but said the power price freeze
could lead to an insignificant growth of power producers’ payables
or receivables. The analysts also said they expected a sector
recovery in the second half of 2012.
Shmatko’s statement is not expected
to influence the business of power generating companies, as no
additional measures over regulation in the power sector have been
taken, said Reyli from Metropol. While Reyli believes Shmatko’s
statement will not affect investors’ attitude in regards to the
power sector, other analysts said that this artificial limitation
in the sector could worsen investors’ mood. “The
government’s interference gives a negative pattern to the sector
perception, taking into account the fact that the government’s
regulatory pressure was already quite significant in 2011,”
Alfa-Bank utilities analysts said.
On January 20, Shmatko said that the sector
would gradually return to its usual operations in March–June.
Analysts hope power producers will be able to receive compensation
for their growing expenditures after the presidential elections,
when pressure on prices is expected to weaken, but how the measure
will be implemented is not exactly clear as of yet.
Reyli from Metropol said there were
two points-of-view over the current situation in the sector and
outlook for the post-election period. The first perspective implies
that industry regulation is occurring only in the pre-election
period and that the sector will return to its usual operations
after the poll. The other side provides that this move is part of a
gradual tightening of regulation that will continue after the
elections, the analyst explained, adding he is sticking to the
second point of view.
In 2012, free power prices will increase by
6.4%–8.6%, while tariffs are expected to increase by 5.8%–7.5%,
Mikhail Lyamin, a utilities analyst at NOMOS-Bank, estimates.
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