Russia power investors say reform promises broken
* Investors blame financial crisis
* Say state must intervene, reform reversal possible
By Simon Shuster
MOSCOW, Nov 25 (Reuters) - The long-term promise of Russia's power sector has been put in doubt by the financial crisis, and the reforms that shaped it are not keeping their pledges to investors, industry leaders said at a summit on Tuesday.
"When investors entered this market...there were certain carrots at the end of the stick," said Sergei Emdin, the head of EuroSibEnergo, an electricity investment unit of Russia's richest man, Oleg Deripaska.
"All of these carrots either did not materialise at all or came out in some way retarded," Emdin told the industry summit.
The soaring demand for electricity that was promised by Russia's now-defunct power monopoly has turned into a possible contraction in demand, the delegates said, while the promised abolition of price caps on power are at risk of being delayed.
"In the first half of November, we have seen a significant drop (in demand)," said Mikhail Slobodin, the head of billionaire Viktor Vekselberg's investment vehicle, Integrated Energy Systems. "We are back at demand levels seen in 2006."
The chorus of complaints and worries came at the first meeting of industry leaders since the Soviet-era power monopoly, UES, was liquidated on in July -- only months before the financial turmoil changed the landscape of the sector.
State-controlled UES, which created and sold the firms that now populate the market, promised investors that the state would allow electricity prices to rise while demand would continue to soar, making for handsome profits years into the future.
Foreign majors such as Italy's Enel (ENEI.MI), Germany's E.ON EONG.DE and Finland's Fortum (FUM1V.HE) spent billions of dollars acquiring control of the UES subsidiaries.
"So now we are left to answer the two eternal questions...whose fault is it and what do we do now," said Vladimir Kiryukhin, the general director of En+ Development, another of Deripaska's electricity units.
Some market participants proposed a return to state dominance of the sector, at least until the crisis passes.
"Here we need sweeping government intervention (on the power capacity market)," said Emdin of EuroSibEnergo. "Investors now are simply afraid to enter any project. They don't know how much it will cost or how much they will be able to sell (power) for."
But even those who were not ready to hand the sector back to state control said that some reversal of the reforms may have to be considered.
Slobodin, whose company controls four major generating firms, pointed out that the crisis was causing an overall industrial slowdown, which meant that consumers would not need as much electricity as originally planned.
"If the situation of such low metals prices continues, (metals firms) will undoubtedly correct their development plans," he said.
The cost of new electricity capacity on the liberalised market is three times higher than old capacity under the previous system, Slobodin said, adding that heavy industries cannot take such a sudden spike in costs at a time of crisis.
Dmitry Ponomaryov, the head of the Market Council, the sector's main lobbying group and one of its regulators, said there is already intense pressure on the market from industrial consumers to keep power prices from reaching free-market levels.
"The energy ministry is getting letters about this all the time... In the worst case, this could lead to a total rethinking of the liberalisation plan, either of the entire model or some part of it," Ponomaryov said.
In the sphere of electricity grid companies, Russia is already being forced to delay the implementation of a new pricing scheme meant to allow grid operators to become profitable [ID:nLP49706].
(Editing by Erica Billingham)
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