Operational results of electricity and heat markets

In 2007, the wholesale electricity (capacity) market in Russia had 203 participants, 108 of which were subsidiaries and dependent companies of RAO "UES of Russia".

In January to June 2007, 95 percent of electricity included in the aggregate balance for 2007 approved by the Federal Tariff Service of Russia was sold under regulated contracts on the wholesale markets, while in July to December 2007, the figure stood at 90 percent (this was in accordance with Resolution of the Russian Government No. 205 of 7 April 2007).

The weighted average price on the wholesale electricity (capacity) market in 2007 made RUB523.9/MWh, or 56.4 percent higher than the average electricity rate set by the Federal Tariff Service of Russia for 2007 (RUB335/MWh).

In the first price area (Europe plus Urals), the weighted average price was RUB579.4/MWh, or 66.1 percent higher than the average tariff, RUB348.8/MWh, while in the second price area (Siberia), which has a large share of hydropower generation, the price was RUB295.8/MWh, or 16.3 percent higher than the average tariff of RUB254.4/MWh.

The significant volatility of electricity prices on the day-ahead market was caused by a large number of factors affecting these prices. Market-based electricity prices are driven by changes in demand and supply which, in their turn, are influenced by a variety of factors: demand is affected by air temperature, lighting, length of daylight hours, while supply depends on the mix of generating equipment selected by System Operator, equipment repair schedules, fuel inventories and fuel prices.

The significant price increase in the first price area in February 2007 was due to the lower temperatures which led to increased electricity use, i.e. was influenced by a change in demand. The same factor contributed to the price increase observed in the first price area in November and December 2007.

The hikes in electricity prices in the first price area in April, August and September 2007, and in the second price area in the second half of 2007 were driven by supply. In April, the price increase in the first price area was due to the scheduled reduction in the supplies of gas sold at regulated prices in the second quarter of 2007. The August-September price rise was caused by the scheduled repairs which led to reduced power supply, including the supply of electricity generated by nuclear power plants with a relatively low self-cost. In the second price area in H2 2007, there was a decline in supply of cheap electricity generated by hydropower plants (caused by lower water inflows), as a result of which the prices in Siberia began to be determined by coal-fired power plants.

Throughout 2007, daily electricity price fluctuations were as follows: during the minimum load hours the prices were much lower than those during the peak load hours. This gave consumers incentives to save energy and change their load patterns. The incentives to cut energy consumption during the hours with the highest prices and, accordingly, the peak load in the energy system are created not only for the wholesale market buyers, but also for consumers on the retail market (except for households), for which energy retail companies started to use, beginning in September 2006, unregulated prices of the wholesale market for the calculation of the cost of electricity sold.

WEIGHTED AVERAGE PRICES OF THE DAY-AHEAD MARKET, BY HOUR, RUB/MWh
1st Price Area "Europe+Urals"

WEIGHTED AVERAGE PRICES OF THE DAY-AHEAD MARKET, BY HOUR, RUB/MWh
2nd Price Area "Siberia"

The difference in prices set for different regions suggests that the transmission capability of networks plays an important role in shaping the electricity prices on the new market: higher prices in certain regions compared to average prices indicate that there are some power transmission bottlenecks, which makes it impossible to transfer the required amounts of electricity from the cheaper power producers based in the neighbouring regions. The same applies to the areas with relatively low prices. For instance, electricity prices in the republics located in the Northern Caucasus are much higher than the average prices in the first price area (20.5 percent in 2007). This was due to the existence of limitations which separate these areas from the other parts of the integrated energy systems of the Northern Caucasus, mostly in Q1 and September to December 2007. Another example is the Murmansk Region, which has low prices (23.9 percent lower than the weighted average prices in the first price area in 2007), which are caused by the supply of cheap electricity generated by the hydropower plants and the Kolskaya NPP and the existence of network limitations on the electricity transmission from the generators to the neighbouring regions.

Thus, the market results for 2007 suggest that the price signals of the national wholesale and retail electricity market (NOREM) reflect changes in demand and supply on a daily, weekly and annual basis, help identify the grid infrastructure bottlenecks and assess the actual limitations in the bulk transmission network, as well as the effectiveness of investment projects being implemented to address these issues.

In 2007, 740.4 billion kWh of electricity was to be generated in the first price area according to the trading schedule (taking into account the electricity supplied by isolated power plants), of which 505.6 billion kWh was scheduled for generation by subsidiaries of RAO "UES of Russia".

In the second price area, the amount of electricity scheduled for generation was 198.9 billion kWh (taking into account the electricity supplied by isolated power plants), of which companies of RAO "UES of Russia" were to generate 126.5 billion kWh.

STRUCTURE OF ELECTRICITY DELIVERIES ON THE DAY-AHEAD MARKET IN 2007, BY TYPE OF POWER PLANT*, millions of kWh

The amount of electricity to be purchased under the trading schedule in 2007 in the first price area was 713.6 billion kWh, of which 527.2 billion kWh was to be purchased by subsidiaries of RAO "UES of Russia".

The amount of electricity to be purchased under the trading schedule in 2007 in the second price area was 197.1 billion kWh, of which 116.2 billion kWh was to be purchased by subsidiaries of RAO "UES of Russia".

In 2007, 230 unregulated contracts were concluded on the day-ahead market in the first price area and 28 contracts in the second price area.

STRUCTURE OF ELECTRICITY SOLD AND PURCHASED ON THE DAY-AHEAD MARKET, MILLION OF KWH

	2007
Sales
Electricity sold by RAO UES SDCs	632,163.8
including imports	8,282.9
Electricity sold by other generators	307,082.2
TOTAL	939,245.9
Purchases
Electricity purchased by RAO UES SDCs	646,062.4
including exports	20,920.1
Electricity purchased by other generators	273,800.0
TOTAL	919,862.4

During 2007, RAO UES subsidiaries sold 442.4 billion kWh of electricity under regulated contracts in the first price area.

In the second price area, the amount of electricity sold under regulated contracts by the Company's subsidiaries amounted to 101 billion kWh, including 2 billion kWh of imported electricity.

During 2007, the subsidiaries of RAO "UES of Russia" purchased 473.5 billion kWh of electricity under regulated contracts in the first price area, of which purchases for exports amounted to 9.9 billion kWh.

In the second price area, the amount of electricity purchased under regulated contracts by the Company's subsidiaries amounted to 90.8 billion kWh, including 0.2 billion kWh of electricity for exports.

	2007
SALES
Electricity sold by RAO UES SDCs	543,334.2
including imports	2,035.7
PURCHASES
Electricity purchased by RAO UES SDCs	564,272.7
including for export	10,105.9

According to the balancing market rules, the production and consumption volumes as well as equilibrium prices of electricity on the balancing market are determined based on the competitive selection of bids and offers submitted by participants and suppliers of the wholesale market with regulated consumption according to a procedure similar to the competitive selection of price bids and offers on the day-ahead market.

In 2007, the production and consumption deviation figures on the wholesale market were not more than 3 percent higher than the target values. This suggests that the sector participants have been able to adapt themselves adequately to the new rules of the wholesale market.