Target Markets

The COVID-19 pandemic and the restrictions related thereto have affected the entire global economy, but with different intensity and different budgetary implications. The most important thing seems to be the zeroing or moving into the negative area of official interest rates in developed economies and their drastic reduction in developing economies. This made it possible to stabilize the financial markets quickly enough and to ensure the possible increase in the national debt required to implement programs to support the economy and to compensate the persons affected by quarantines in the key countries of the world.

For oil-producing countries, it was a year of a record-breaking drop in demand and oil prices as well. However, the agreement of the OPEC + countries to reduce oil production from 01 May 2020 and a voluntary reduction in oil production by other major oil producers helped stabilize the situation in the oil market during the crisis. The OPEC+ countries agreement was entered into until the beginning of May 2022 and provides for flexible regulation of oil output subject to the recovery in demand and the increase in global economic activity.

China was the only country to avoid an economic slump in 2020: its GDP added +2.3% as compared to 2019. Russia’s GDP declined by 3.1% only in 2020, which is a lower drop than in the developed countries. This is due to a more selective nature of quarantine measures during the pandemic in Russia and a limited use of nationwide lockdowns. Furthermore, this is due to the structure of the economy that has a large public sector with a relatively minor role of the service and SME sector that is most vulnerable to COVID-19. IMF specialists note that the downturn in 2020 might have been way stronger without the extraordinary political support of the global economy. The COVID-19 pandemic is expected to have fewer consequences than the 2008 financial crisis.

The IMF predicts a solid growth in global GDP at a rate of 6.0% in 2021 and 4.4% in 2022. In the medium term, the global economy is expected to grow at a rate of 3.3%. The IMF forecast for the Russian GDP in 2021 and 2022 is 3.8% each, which is even better than the forecast by the Ministry of Economic Development of the Russian Federation published in April 2021 (+2.9%).

According to Federal State Statistics Service estimates, in 2020 the inflation in Russia amounted to 4.9%. The increase in the 2020 inflation was mainly contributed by the weakening of the ruble, the growth of exchange prices for food products and the yield of certain crops that was below the record-breaking levels of 2019. The 2021 and 2022 inflation forecasts of the Ministry of Economic Development of the Russian Federation is 4.3% and 4.0%, respectively, which points to the fact that disinflation factors prevail in the forecasts.

The electric power industry is a basic branch of the Russian economy, providing electric and heat power to the national economic enterprises and the population, as well as exporting electric power to the CIS countries and far abroad.

The Unified Energy System of Russia consists of 7 integrated power systems (IPSs) connected by intersystem links: the IPS of the East, the IPS of Siberia, the IPS of the Urals, the IPS of the Middle Volga, the IPS of the South, the IPS of Centre and the IPS of the North-West. The isolated power systems include the territories that are not technologically connected with the UES of Russia: the Chukotka Autonomous District, the Kamchatka Territory, Sakhalin and Magadan Regions, the northern part of the Republic of Sakha (Yakutia), Norilsk-Taimyr and Nikolaev power districts.

At the end of 2020, the total installed capacity of the power plants of the UES of Russia amounted to 245,313.3 MW and decreased by 1,029.2 MW or 0.4% as compared to 2019.

In 2020, the electric power consumption and generation in the UES of Russia decreased as compared to 2019 due to higher outdoor temperatures in the first quarter of 2020 as compared to the climatological norms, as well as due to the COVID-19 pandemic and the OPEC+ Agreement to reduce oil production.

In 2020, the electric power consumption in the UES of Russia amounted to 1,033.7 bln kWh that is by 2.4% less than the consumption volume in 2019 or 2.7% without the effect of an additional day in the leap year of 2020.

The electric power generation by the power plants of the UES of Russia amounted to 1,047.0 bln kWh (that is less by 3.1% or 3.4%, without the effect of an additional day in the leap year of 2020, than in 2019).

The more significant decrease in the generation as compared to the decrease in the electric power consumption was the result of a decrease in electric power export from the UES of Russia. In 2020, the balance of electric power exchange through the interstate power transmission lines for the output to the mains amounted to 13.3 bln kWh and decreased by 37.2%. The electric power output to the mains from the UES of Russia decreased mainly to Finland and the Baltic countries in 2020 as compared to 2019 that is related to cheaper prices in the Nord Pool electric power market due to the widespread reduction in the electric power demand in the context of the COVID-19 pandemic and high electric power generation by wind farms of Sweden.

Currently, there is a two-level electric power market in the Russian Federation, i.e. the wholesale (Wholesale Market for Electricity and Power) and the retail (Retail Market for Electricity and Power) market. Wholesale market participants are generation companies (retailers of electric power and capacity), sales companies, grid companies, large consumers (buyers of electric power and capacity). Electric power in the retail market is traded under free bilateral contracts with consumers.

Unipro PJSC operates in the wholesale market for electricity and power.

Electric power and capacity are bought and sold in accordance with the Rules of the Wholesale Market for Electricity and Power Operation and the Agreement on Adherence to the wholesale market for electricity and power Trading System established by Resolution of the Government of the Russian Federation No. 1172 dated 27 December 2010.

According to legislation, electric power and capacity volumes to be supplied to households and equivalent consumer categories under regulated contracts were stipulated for each seller in the Wholesale Market for Electricity and Power.

The remaining generated electric power and capacity volumes are supplied at non-regulated prices on the wholesale market.

Tariffs for the supply of electric power and capacity under regulated contracts are set by the federal executive body for tariff regulation.

The regulated tariffs for electric (heat) power (capacity) set for Unipro PJSC power plants vary considerably depending on a number of factors, including power plant performance, its location, the fuel used, investment plans and when the regulation period commences. Smolenskaya GRES and Shaturskaya GRES have historically had higher tariffs compared to power plants located in the Ural Federal District, Volga Federal District, and Siberian Federal District, where gas and coal prices are lower than in Central Russia.

In 2020, Unipro PJSC power plants had electric power sales that amounted to 48.8 bln kWh, which is 4.2% lower than in 2019. The capacity sales increased by 1.0% compared to 2019 and amounted to 9,996 MW per month.

In 2020, regulated contracts accounted for 22.2% of electric power sales and for 26.4% of power sales.

The revenue from sales of electric power and capacity in the regulated segment of market amounted to RUB 15 bln (16% of the total revenue from electric power and capacity sales by Unipro PJSC).

The entire margin from electric power sales was secured by operation in the competitive sectors of the wholesale market. The Company is constantly improving its business strategy for the competitive sectors of the market in order to gain maximum profit.

The sale of heat energy in accordance with the legislation of the Russian Federation is a regulated type of activity.

Heat tariffs are set by executive authorities of Russia’s constituent entities that deal with state tariff regulation. The price of heat power is a significant public concern in the regions where power plants are located. That is why affordability of this product and the consumers’ solvency are taken into account in the regulation process.

Heat generation and sales are not the key business area for Unipro PJSC. Following the results of 2020, revenue from heat power sales was about 1.7% of the Company’s total revenue. Nevertheless, Unipro PJSC devotes a lot of attention to ensuring the reliability and continuity of the heat power supply, as this is essential to support local consumers living in the nearby communities.

Consumers of heat power produced at the branches of Unipro PJSC are the general population, local industry, as well as enterprises and entities funded from budgets at all levels. The material terms and conditions of contracts with consumers for unified heat-supplying organizations (UHSO) are specified on the corporate website of the Company at http://www.unipro.energy.

The amount of heat supplied to consumers in 2020 was 11% less than in 2019. The lower net output was due to weather conditions.

Since the beginning of 2011, the market for services that provide system reliability (the system services market) has been operating in the Unified Energy System of Russia; its goal is to maintain the required level of reliability and operational quality for the UES of Russia.

Unipro PJSC has been a participant in the system services market since it was launched, rendering the service of rated primary frequency control (RPFC).

The primary frequency control is intended for limiting frequency deviations in the power system after the emergence of a power imbalance in any of its parts. The RPFC provides guaranteed quality of primary control. It is performed by automated frequency and active capacity control systems of the allocated generating equipment that has more advanced control system features than the standard equipment. On that generating equipment, the System Operator places a reserve for the primary control (the reserve for loading/unloading equipment in terms of active capacity).

This service provides for maintaining the constant readiness of the power units to change the active capacity with the required speed and accuracy in case of frequency variation in the power system.

Unipro PJSC is a leader among generation companies in terms of its share in the RPFC services rendered (over 20%). Specially prepared power units of Surgutskaya GRES-2, Shaturskaya GRES and Berezovskaya GRES are involved in the RPFC.

The electric power industry operates in a highly regulated environment. Carrying out its activities in the WMEP, Unipro PJSC must promptly respond to changes in the regulatory legal acts governing the company’s business. The important aspects for the functioning of the Company are as follows:

• timely provision of information (changes, news, trends) on the statutory regulation of the wholesale market for electricity and power to the block of energy markets and the related subdivisions of the Company;
• promoting the Company’s interests by submitting proposals for amending regulatory documents from the level of federal laws to the level of regulations for the functioning of the wholesale market for electricity and power.

For this purpose, being a member of a number of industry associations (NP Market Council and Council of Power Producers Associations, Russian Union of Industrialists and Entrepreneurs, etc.), Unipro PJSC takes an active part in the discussion of draft regulatory legal acts (RLAs) and the wholesale market regulations. The Company is involved in public discussions of draft RLAs in accordance with the legislation:

• public debates when drafting an opinion on regulatory impact;
• independent anti-corruption expert review;
• meetings held by ministries and government agencies;
• working teams and expert councils.

In 2019, a large-scale programme, the CCSMod was launched to modernize the generation assets of thermal power plants. The CCSMod programme continues and develops. In 2020, another power unit of Surgutskaya GRES-2 was successfully selected with the start of capacity supply in 2026. In total, Unipro has currently 4 modernization projects and active work is underway on a number of potential projects. Preparations for and participation in the selection is a multi-stage process that requires involvement of the majority of the Company’s functions. The energy markets function administers this area and ensures the mitigation of regulatory risks at the stages of selection, construction, commissioning and future operation of the facilities to be modernized. It is significant that in 2020, the CCSMod programme was significantly improved. Namely:

• the programme was supplemented by separate competitive selection of projects that include the transfer of the equipment operation from a steampower cycle to a steam-gas cycle using innovative gas turbines;
• the scope of mandatory work on a number of events within the CCSMod projects was extended.

In 2021, the market community will have to fine-tune the conditions for the selection of projects based on innovative gas turbines at the level of the Resolution of the Government of the Russian Federation and to conduct a “salvo” competitive selection of such projects with the capacity supply years of 2027—2029.

In 2020, issues of the extension of the mechanism for supporting projects based on renewable energy sources (RES) and for decommissioning of generating assets began to be discussed in depth. Unipro focuses on those important regulatory processes as well.

The following are the most notable RLAs in the electric power industry adopted in 2020 which were also drafted with contributions from experts at Unipro PJSC:

1. Federal Law On Amendments to the Federal Law On Electric Power Industry in terms of Improving the Procedure for Repair and Decommissioning of Electric Power Facilities No. 281 dated 31 July 2020.
2. An RLAs package aimed at changing the timing and improving CCSMod:
   • Resolution of the Government of the Russian Federation On Amendments to Certain Acts of the Government of the Russian Federation on Improving the Mechanism for Raising Investments in Modernization of Generating Facilities of Thermal Power Plants and Additional Selection of Projects for Modernizing Generating Facilities of Thermal Power Plants Using Innovative Power Equipment No. 948 dated 29 June 2020;
   • Resolution of the Government of the Russian Federation On Amending Clause 264 of the Rules of Wholesale Market For Electricity And Power No. 349 dated 27 March 2020;
   • Resolution of the Government of the Russian Federation On Amending Clauses 100 and 264 of the Rules of Wholesale Market For Electricity And Power No. 1318 dated 31 August 2020;
   • Resolution of the Government of the Russian Federation On Amending the Rules of Wholesale Market For Electricity And Power No. 1571 dated 01 October 2020;
   • Resolution of the Government of the Russian Federation On Amendments to Certain Acts of the Government of the Russian Federation on Improving the Mechanism for Raising Investments in Modernization of Generating Facilities of Thermal Power Plants and Additional Selection of Projects for Modernizing Generating Facilities of Thermal Power Plants Using Innovative Power Equipment No. 1974 dated 30 November 2020.
3. Order of the Ministry of Industry and Trade of Russia On Approval of the Procedure for Issue of a Document with Review of Reports Certifying that Industrial Products to be Operated upon Completion of Thermal Power Plant Modernization Projects have been Manufactured within the Russian Federation No. 4007 dated 18 November 2020
4. Resolution of the Government of the Russian Federation On Amendments to Certain Acts of the Government of the Russian Federation on Setting Prices (Tariffs) for Electric Power (Capacity) Supplied by Wholesale Market Participants Producing Electric Power (Capacity) No. 1977 dated 01 December 2020.
5. Resolution of the Government of the Russian Federation On Approval of Criteria for Classification of Hydraulic Engineering Structures No. 1607 dated 05 October 2020.