06MOSCOW12572, RUSSIA: WINTER POWER SHORTAGES EXPECTED

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Reference ID Created Released Classification Origin
06MOSCOW12572 2006-11-22 08:53 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXYZ0014
PP RUEHWEB

DE RUEHMO #2572/01 3260853
ZNY CCCCC ZZH
P 220853Z NOV 06
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5359
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L MOSCOW 012572 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS; EB/ESC 
DOE FOR HARBERT 
DOC FOR 4231/IEP/EUR/JBROUGHER 
NSC FOR GRAHAM AND MCKIBBEN 
 
E.O. 12958: DECL: 11/16/2016 
TAGS: ECON EIND ENRG PREL RS
SUBJECT: RUSSIA: WINTER POWER SHORTAGES EXPECTED 
 
REF: MOSCOW 12261 
 
Classified By: Econ M/C Quanrud by reason 1.4 (b) and (d). 
 
1. (C) Summary. Government officials and industry analysts 
are expecting power shortages in Russia this winter as 
electricity consumption growth strains the existing power 
infrastructure.  UES Head Chubays has warned GOR officials 
all year about looming electricity shortfalls.  UES is 
considering incentive schemes to decrease burdens on the 
power system this winter, such as paying businesses for 
reducing electricity use during peak hours. In 16 regions, 
UES officials are also working with authorities to identify 
 
SIPDIS 
businesses that may be subjected to power interruptions 
during capacity shortages.  Despite being the largest 
domestic consumer of gas, UES is also pushing the GOR to 
raise domestic gas prices to stimulate more longer term 
supply.  In a worst case scenario, unexpected equipment 
failures and fuel supply disruptions could lead to widespread 
and prolonged outages throughout the country this winter. End 
summary. 
 
2. (SBU) Last winter, extreme cold weather forced the 
electricity monopoly, RAO UES, to disrupt power supplies to a 
number of businesses in Moscow City, St. Petersburg, and 
Tyumen region. During peak periods, electricity demand in 
these regions exceeded previously recorded maximums by 24, 
10, and 15 percent, respectively.  According to UES 
officials, electricity demand this year grew faster than 
expected at 4.8 percent - more than double last year's 
growth. 
 
3. (C) UES Head Chubays has been warning GOR officials all 
year about looming electricity shortfalls.  This summer, on 
the anniversary of the May 2005 Chagino blackout in Moscow 
when one third of the city was left without electricity for a 
day, he told the press that large cities faced summer power 
shortages because of widespread usage of air conditioning 
equipment. (Comment: According to UES Head of Strategy, 
Alexey Kachay, summer peak loads are new phenomena in Russia. 
In the past, UES experienced peak loads only during winter 
months.)  On October 12, Chubays warned that Russia would 
switch from being a net exporter of electricity to a net 
importer this winter.  While he assured foreign consumers 
that all supply contracts would be honored, he noted that 
domestic needs would curtail any increases in foreign power 
exports. 
 
UES GEARING UP FOR WINTER 
 
SIPDIS 
------------------------- 
 
4. (SBU) UES and regional authorities are busy undertaking 
preparations for the peak winter months.  According to 
Kachay, Chubays chairs an internal task force that meets 
regularly to trouble shoot and solve potential problems for 
the upcoming months.  UES is also considering incentive 
schemes to decrease peak load burdens on the power system 
this winter.  Under one plan, UES would pay businesses for 
reducing electricity use during peak hours.  Kachay said that 
peak hours are usually at ten in the morning and five in the 
evening.  Businesses would receive four to five rubles for 
every kilowatt hour not used during these periods. 
 
5. (C) As a result of expected shortages, UES has also 
identified 16 regional power systems that will likely face 
interruptions and scheduled blackouts this winter.  UES 
officials are working with regional authorities to list 
businesses that may be subjected to power interruptions in 
the event of capacity shortages.  In addition to the three 
regions affected last winter, UES has added; Moscow oblast, 
Leningrad, Komi, Vologda, Kuban, Tuva, Karelia, Dagestan, 
Sverdlovsk, Perm, Chelyabinsk, Ulyanovsk, Saratov, 
Nizhnygorod, and Arkangelsk regions.  According to Kachay, 
rapid economic growth in these regions is driving electricity 
demand beyond the capacity of their power infrastructure. 
(Comment: Retail trade in these 16 regions has grown 17 
percent on average in the first nine months of 2006, compared 
to the Federation average of 12 percent, according to 
official statistics.  End comment.) 
 
BEYOND THIS WINTER 
------------------ 
 
6. (C) Chubays has managed to push through key components of 
his power sector reform this year that could increase 
investment into upgrading and expanding both the power 
generating and distribution networks over the next few years. 
 Early this year, he won government approval for additional 
share offerings for his restructured power companies, the 
Wholesale Generating Companies (WGC) and the Territorial 
Generating Companies (TGC) to raise much needed investment 
capital.  According to press reports, UES plans to raise up 
to $12 billion over the next two years in public offerings. 
In November, the first public offering for 14.4 percent of 
Wholesale Generating Company 5 (WGC-5) raised $459 million. 
(see reftel) 
 
7. (C) Despite being the l
argest domestic consumer of gas, 
UES is pushing the GOR to raise domestic gas prices to 
 
SIPDIS 
stimulate more longer term supply.  Press reports indicate 
that 70 percent of UES's power plants are gas-fueled with 
another 25 percent powered by coal.  Last winter, gas 
shortages forced UES to switch to fuel oil, or "mazut", which 
is two-to-three times more expensive than gas.  According to 
Chubays, a domestic price for gas at $185 per thousand cubic 
meters (tcm) would still be cheaper than the current cost of 
fuel oil as a substitute fuel. In early November, Chubays and 
Gazprom CEO Miller jointly announced their support for 
increasing domestic gas prices for industrial consumers from 
$45 to $80 tcm next year to meet the growing domestic demand 
for gas.  According to the MEDT's 2007-09 macroeconomic 
forecast, the Federal Tariff Service is scheduled to increase 
gas prices for industrial consumers by 15 percent in 2007. 
(Comment: Government officials and industry experts expect 
gas prices will increase by more than 15 percent next year. 
End comment.) 
 
COMMENT 
------- 
 
8. (C)  A combination of extreme weather, an aging power 
infrastructure under stress, and fuel shortages will 
determine the extent of power disruptions in the coming 
months.  A severe winter this year, in a best case scenario, 
could lead to controlled blackouts in some of the planned 16 
regions. In the worst case, unexpected equipment failures and 
fuel supply disruptions could lead to widespread and 
prolonged outages throughout the country.  On gas prices, the 
GOR continues to wrestle over a difficult and sensitive 
decision. On one hand, higher prices for both gas and 
electricity are a key component to reform and necessary to 
attract the private investment into these sectors.  On the 
other hand, the rapid rise of utility prices have been a 
source of social dissatisfaction in the past and political 
considerations are likely to take center stage as the 
election cycle begins next year. President Putin had agreed 
to convene a government meeting to discuss the issue of 
higher gas prices, but has twice postponed it.  According to 
the press, the meeting is scheduled to take place November 
22. End comment. 
BURNS

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