ELECTRICITY AND HEAT MARKETS

Foreign Markets

9.4

In July 2005, OAO RAO "UES of Russia" completed the transfer of its electricity export/import contracts to its subsidiary ZAO "INTER RAO UES", in which OAO RAO "UES of Russia" holds a 60% stake, and Rosenergoatom holds the remaining 40%.

Electricity Exports

In 2005, OAO RAO "UES of Russia" and ZAO "INTER RAO UES" exported 22.07 billion kWh of electricity, up 3.29 billion kWh or 17.5% over 2004. The exports growth was due to the increased electricity supplies from Russia to the Republic of Belarus after the electricity pricing issues were resolved between the countries.

The total revenues from electricity exports in 2005 amounted to USD586.55 million.

ELECTRICITY EXPORTS

Electricity Exports to the CIS Countries

Azerbaijan

In 2005, the electricity exports from Russia to Azerbaijan declined to 1 billion kWh, down 11.2% compared to 2004.

Republic of Belarus

The Republic of Belarus is potentially the largest consumer of Russian electricity among the CIS member countries. In 2004, the supplies were limited, which was due to the pricing disagreement. In 2005, the issue was resolved, and the electricity exports to Belarus more than tripled over 2004 to 4.68 billion kWh.

Georgia

The electricity exports to Georgia in 2005 totalled 789.6 million kWh, which was nearly the same as in 2004.

Kazakhstan

In 2005, electricity exports to Kazakhstan declined 13.7% compared to 2004 to 1.92 billion kWh.

Republic of Moldova

Electricity exports to the Republic of Moldova in 2005 amounted 801.73 million kWh, down 12.6% compared to 2004.

Ukraine

In 2005, there were not electricity sales to Ukraine's energy system; however, Russian electricity was transmitted via the Ukrainian power grids to the Republic of Moldova.

Exports to Non-CIS Countries

China

Over 2005, the cross-border sales of Russian electricity to China grew 45.3% to 491.9 million kWh.

Latvia

Due to the high water inflow in the Western Dvina (Daugava) river and increased generation by Latvia's HPPs, electricity exports to Latvia in 2005 declined 23.9% on 2004 to 525.2 million kWh.

Lithuania

Lithuania's energy system produces surplus electricity: the greater part of the electricity consumption is covered by the power generated by the Ignalina NPP. With effect from January 2005, one of the two power units at the NPP was shut down. After the plant's second power unit was shut down for repair, the Lithuanian energy system experienced energy shortfalls and had to import electricity from Estonia and Russia. In 2005, the exports of Russian electricity to Lithuania amounted to 612.6 million kWh.

Mongolia

Electricity exports from Russia to Mongolia made 173.9 million kWh in 2005, up 3.8% on the year before.

Norway

Electricity exports to Norway in 2005 rose 14.8% compared to 2004 to 216.1 million kWh.

Finland

Electricity exports to Finland, which continues to be a major buyer of Russian electricity, remained flat compared to 2004 at 10.86 billion kWh.

Electricity Imports

In 2005, electricity imports totalled 10.14 billion kWh, a decrease of 1.32 billion kWh compared to 2004. The value of electricity imported in 2005 made USD132.71 million.

Kazakhstan

Russia imported 3.86 billion kWh of electricity from Kazakhstan in 2005, a decline of 3.22 billion kWh compared to the year before.

Lithuania

The electricity imports from Lithuania are used to supply power to customers in the Kaliningrad Region. In 2005, Russia imported 2.95 billion kWh of electricity from Lithuania.

Ukraine

Electricity imports from the Ukrainian energy system in 2005 totalled 2.83 billion kWh. The plans for 2005 provided that nearly half of Russian electricity imports would come from Ukraine. However, Ukraine refused in July 2005 to supply electricity to Russia on the terms provided by the contract between Russia and Ukraine and raised the electricity price to a level that was unacceptable for Russia, so the electricity imports from Ukraine were stopped.

This created a threat that the contracts to supply electricity to Belarusian customers might be breached. As a result, electricity had to be imported from other countries and purchased on the wholesale electricity (capacity) market. These measures helped ensure the necessary supply of electricity to Belarus.

Promising Projects

China

In order to improve power supply to domestic customers and increase electricity exports to the border districts of the North-East provinces of China, two investment projects are being implemented to build a 220 kV transmission line "Blagoveshchensk - Sirius" (scheduled for commissioning in Q3 2006) and a 220 kV transmission line "Zavitaya - Siunke" (to be placed on line in 2008). The Company is exploring the possibility of building a 220 kV transmission line "Obluchye - Lobey" and some other lines to China's districts adjacent to the Russia-China border.

After these cross-border transmission lines are put in operation, electricity exports to China's North-East provinces in 2008-2009 may reach 5 billion kWh annually.

An important step to expand cooperation with the People's Republic of China was the signing of the Agreement to conduct a feasibility study for the project to supply electricity from Russia to China. The Agreement provides for the conduct of a feasibility study on exporting about 60 billion kWh of electricity to China annually.

Finland

At present, OAO RAO "UES of Russia" is exploring the possibility of implementing the following projects aimed at increasing electricity exports from Russia to Finland:

"Karelian cross-border energy link " to build a 45 km 110 kV line able to transport 70 MW of electricity from Karelia to Finland, the project provides for the supply of 453 million kWh annually;

"Kola cross-border energy link" to transport 160 MW of electricity from the Murmansk Region to Finland; the project provides for the supply of 1 billion kWh annually; - ensuring parallel operation of the Yovskaya HPP (2x48 MW) and Kumskaya HPP (2x40 MW) with the Nordel energy pool; - a project to build a cross-border link comprising a 114-km 220 kV line in Finland and a 63.5-km 220 kV line in Russia.