1

RAO UES

Anatoly Chubais, CEO

EEI International Utility ConferenceLondon, March 11, 2008

Power Sector Liberalizationand Climate Change:The Russian Model

2

Russian Power Sector and RAO UES

Russia is the 4th largest electricity market in the world

~5-6% of world generating capacities

Average growth in electricity consumption: 2-4% p.a. since 2006

One of the world’s largest markets…

One of the world’s largest markets…

… is being served by the world’s largest utility

… is being served by the world’s largest utility

Electricity output:

> 70% of Russia’s total

Heat output:

~ 33% of Russia’s total

3

RAO UES: Pre-reform Model

Generation

Low voltage& High voltageGrids

Supply

73 AO-Energos High VoltageGrids

+Grid

Services

CentralisedDispatch

32 FederalPower Plants

MinorityShareholders

RussianGovernment

52% 48%

RAO UES

4

Basics of the Reform: Separation of Monopolistic and Competitive Sectors

Mo

no

po

list

ic s

ecto

rs

Dispatching

Transmission and Distribution grids

Co

mp

etit

ive

sect

ors

Supply

Generation

Private propertyand

market

Government propertyand

Government regulation

5

Reform OpponentsPolitical and Business Elite Changed Their Standing on the Reform Essence

UES

Reform

UES

Reform

Key political factions in the State Duma

Conservatively-minded energy specialists

and scientists

Majority of regional Governors

VIPsin the Government and

Kremlin

Majority of senators in the Federation Council

Influential oligarch groups

2000 - 2008

Majority ofminority

shareholders

6

Competitive market

Government ownershipPrivate ownership

SystemOperator

Monopolistic sectors Competitive sectors

Federal Grid

Company

11

Interregional Distribution Companies

(IDCs)

Hydro OGK

Supply

6

Wholesale GenCos (OGKs)

Rosenergoatom (nuclear)

Independent GenCos

14

TerritorialGenCos (TGKs)

Russian Power Sector: Post-reform Model

7

Functional unbundling Legal unbundling Ownership unbundling

The issue is not settled yet for the majority of EU countries: Ownership unbundling of VICs and spin-off of distribution grids

EU countries

Deadline for ownership unbundling of RAO UES (Federal Law No. 250, November 4, 2007)

Russia July 1, 2008

??

Power Sector:Functional, Legal and Ownership Unbundling

8

Competitive Wholesale Market:Supply/Demand Equation Prices

Source: Administrator of Trade System (ATS)

Average prices (Europe+Urals and Siberia), Euro/MWh

6

9

12

15

18

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Day (Apr 07)

6

9

12

15

18

21

01.10.07 08.10.07 15.10.07 22.10.07 29.10.07

Week and month

6

12

18

24

.Sept.06 Oct.06 Nov.06 Dec.06 Jan .07 Feb .07 Mar .07 Apr .07 May.07 Jun .07 Jul .07 Aug.07 Sept.07 Oct.07 Nov.07 Dec.07 Jan .08 Feb 08

Year

9

Power Market DevelopmentPace of Liberalization: Government’s Plan and Actual Progress

All new capacity and consumption commissioned after 2007 go to the free market

0%5%

10%15%

25%30%

50%

60%

80% 100%

0%

20%

40%

60%

80%

100%

Jan 1, 2007 Jul 1, 2007 Jan 1, 2008 Jul 1, 2008 Jan 1, 2009 Jul 1, 2009 Jan 1, 2010 Jul 1, 2010 Jan 1, 2011Sept 1, 2006

~18% (Sept 06)

~20% (Jan 08)

Excluding electricity consumption by households

actual pace of liberalization (facts and estimates)

mandatory increase of the liberalized market share

~ 25%

~35%

~40%

~60%

~70%

~90%100%

10

Electricity Market System: Target Model

Competitivewholesaleelectricity

marketas of September 1,

2006

Competitivewholesaleelectricity

marketas of September 1,

2006

Capacity market 2008

Ancillary service market2008

Derivative market2008

Liberalized retail marketsas of September 1, 2006

11

Electricity Demand Growth Outlook: Mid-term and Long-term View

Mid-term Long-term

Source: UES estimates

Basic scenario Optimistic scenario

kWh, bln

Average annual increase in 2006-10: 3,5% (basic scenario)

0,980

1,003

1,035

1,070

1,120

0,9

1

1,1

1,2

2006 2007 2008 2009 2010

3,5

4,3

3,73,9

3

4

0

1

2

3

4

5

2006-2010 2011-2015 2016-2020

%%

12

Prospects until 2030:Target Concept, General Scheme, Investment Programs

2006

2010

2020

2030

General Scheme for locating power capacity until 2020

Target Concept for Development of the Russian Electricity Power Sector until 2030

2006-2010 Investment Program

of UES Holding Company

5-year investment programsof energy companies

from 2008

2006 2010 2020 2030

13

CAPEX 2006-2010 – 93 bn EuroSources of Financing

Private investmentsState budget financing

Credits and loans Companies’ funds

Other

Euro, bn

4.8 (5%)

15 (16%)

22.8 (25%)

22.9 (25%)

27.5 (29%)

0 10 20 30 40

Total: ~93 bn Euro (private investments ~27.5 bn Euro)

14

374

1099

1857

0

500

1000

1500

2000

Thermal OGKsand TGKs

Emerging markets Developedmarkets

EV/IC, Euro/kW

(Feb 08, weighted average)

8198

3199

22756

0

5000

10000

15000

20000

25000

DisCo's Emergingmarkets

Developedmarkets

EV/length, Euro/km

(Feb 08, weighted average)

Thermal generation-2008: Key growth drivers

Market liberalization causes a stable rise in electricity prices

M&A. The approaching competitive sale of OGK and TGK shares to strategic investors makes these assets more attractive to portfolio investors

Distribution grids-2008: Key growth drivers:

Consolidation of 61 regional grid companies converted into 11 interregional distribution companies (IDCs): higher liquidity; lower cost of capital; entry of large companies with a high free float into the stock market

RAB: higher transmission tariffs; optimized revenues, profits, and investments of IDCs

Connection fees as an effective CAPEX mechanism

Thermal Generation and Grid Assets: Undervaluation and Growth Potential

15

Funds raised so far and yet to be raisedFrom Competitive Share Placements and Sales to Strategic Investors

Total: ~ 27.5 bn Euro

27,5

0,4

10

20

30

Euro in billions Fact: 18.8 bn Euro

UES estimates:+ 8.5 bn Euro

0,80,5 0,70,20,30,4 0,40,8 0,7 1,3

3,1

0,30,50,60,20,41,51,2

0,4

2,4

0,31,7

1,1 0,7

4,2

2,00,7

TG

K-1

3

TG

K-1

4

TG

K-7

Apr May MayMar08 08 0808

TG

K-4

TG

K-1

2

May08

TG

K-9

TG

K-1

2

OG

K-6

TG

K-3

TG

K-9

Dec Dec Dec Jan Jan07 07 07 08 08

OG

K-5

OG

K-3

TG

K-5

TG

K-3

OG

K-5

OG

K-4

TG

K-1

OG

K-2

TG

K-8

OG

K-3

Nov Mar May May Jun Sep Sep Sep Oct Oct06 06 07 07 07 07 07 07 07 07

TG

K-1

0

TG

K-7

TG

K-1

1

TG

K-6

TG

K-1

0

OG

K-1

Feb Mar Mar Mar Mar Mar Mar08 08 08 08 08 08 08

TG

K-2

16

2006-2010 RAO UES Capacity Commissioning Program

MW 2006 2007 2008 2009 2010 2006-2010

Thermal generationOGKs, TGKs, RAO UES

1 186 1 545 2 050 5 788 14 364 24 934

Hydro OGK 67 690 420 1 224 1 612 4 013

Total commissioning 1 253 2 235 2 470 7 089 15 919 28 947

0

5,000

10,000

15,000

20,000

MW

2006 2007 2008 2009 2010

17

RAO UES Investment Program for 2006-2010: Higher Demand for Suppliers’ Products and Services*

Power SectorDevelopment

Program

2010 vs. 2006 Generation equipment(Procurements of solely primary generation equipment for OGKs and TGKs):~ 21.6 bn Euro

8-fold

Electrical equipment(Procurements solely for FGC):~ 7.6 bn Euro

4-fold

Coal:~ 731 milliontonnes of coal

40%

Gas:~ 848 billioncub.m. of gas

30%

Construction materials(Solely cement expenses of TPPs and HPPs): ~ 0.3 bn Euro

R&D(Solely in thermal power sector):~ 2 bn Euro

Construction and installation(Solely in thermal power sector):~ 9 bn Euro

4.5-fold

4-fold

8-fold

* Expert estimates

18

2006 2020

Gas generationCoal generation

Nuclear generationHydro generation and other renewable sources

Percent of total41,5

25,1

15,9 17,5

33,232,2

20,5

14

0

10

20

30

40

50

Fossil fuel generation:

66,6%

Non-fossil fuel generation:

33,4%

Fossil fuel generation:

65,5%

Non-fossil fuel generation:

34,5%

Gas consumption increased from 175 bn cu m to 210 bn cu m (or by 20%)

Coal consumption increased from 128 mn t to 285 mn t (or by 123%)

Nuclear generation increased from 23.5 GW to 53.2 GW

Hydro generation increased from 44.9 GW to 71.7 GW

2020 to 2006: Notes

Changes in the Power Generation MixEffects on Carbon Efficiency

Source: RAO UES

19

Carbon Efficiency of the Russian Power Sector: Strategy

SolutionsKey challenges

• A surge in power generation

• Gas-to-coal substitution (the gas share is 8% lower and the coal share is 7% higher in the generation mix by 2020)

• Gas generation: Introduction of combined cycle gas turbine (CCGT) technologies

• Coal generation: Introduction of clean coal technologies (CCT), introduction of carbon capture and storage (CCS) systems

• Other requisite measures:- Development of economic and market-based mechanisms for environment protection: CO2 emission tax; CO2 emission trading system- Development of renewable energy sources (hydro, tidal, geothermal, wind)

Emission efficiency of the Power Sector (CO2 emissions / Generation) 0,73

0,58

0,44

0

0,2

0,4

0,6

0,8

1

1990 2005 2020 (est.)

1990 2005 2020

CO2

emissions, mn t

794 552 783

Generation, bn kWh

1082 953 1793

Source: RAO UES

20

Russian Power Sector: Changes and Estimates of GHG Emissions

2014 2016450

500

550

600

650

700

750

800

850

900

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2018 2020

793.51 (1990) 1990 level 783.3 (2020)

Actual Estimates

CO2 equivalent, millions of tonnes

(basic scenario)

It is not until 2020 that the 1990 level of GHG emissions is exceeded

Source: RAO UES

21

Our journey is about to end

2000

2008