The Barefoot Shoemaker

One of the world’s largest oil and gas exporters seems to have an energy problem.

RAO Unified Energy Systems, Russia’s electricity monopoly, says it will not be able to meet demand in dozens of Russian regions and cities – including St. Petersburg and Moscow -- this winter and for years to come. 

“The country is entering a very difficult and dramatic energy shortage period,” said UES Chief Executive Anatoly Chubais. 

The looming power shortfall will be most severe in Moscow, St. Petersburg and 16 regions throughout the country.

Limitations on energy use this winter will primarily affect companies and not homes. St. Petersburg  is preparing a list of companies the city plans to ask to trim their electricity use, Governor Lyudmila Matviyenko said in September. Over the next three years, St. Petersburg could fall short by 3,000 to 4,000 megawatts a year. 

Part of the trouble is that the country’s obsolete electricity grid cannot serve the growing demand. Moscow energy consumption, for example, will increase 60 percent by 2010, according to Russia’s branch of Greenpeace, an international environmental organization. 

New users will likely be the first to feel the shortage. Industry and Energy Minister Viktor Khristenko said in June that 90 percent of businesses seeking a new power connection in 2007 would not get one. 

However, existing users will not have it easy either. Energy officials have warned that almost half of the country’s generators have exceeded their life span and that the grid is overloaded. UES management saw the problem coming, but left it largely unattended, due to lack of financing in the lean years following the collapse of the Soviet Union. 

Now UES has started an ambitious $90 billion program to modernize its aging power plants and electrical grid over the coming decade. In 2007, the energy firm will spend $26.7 billion on the program, with $1.6 billion coming from the government, and $25 billion raised from loans and initial public offerings of UES subsidiaries.

The reforms also call for liberalization of energy prices. In September, UES began trading small amounts of electricity at free market prices. Previously, the state had set all electricity tariffs and will continue to regulate prices for home users. 

A Soviet era holdover, price props may have also contributed to the present crisis, as they have failed to encourage responsible consumption and energy efficiency. 

Greenpeace estimates Russia’s energy losses at up to 40 percent of consumption, or 400 million tons of oil – equal to all of the country’s oil exports. Homes account for one-third of the wasted energy. 

This may perhaps partially explain why the country, which holds the world’s largest reserves of natural gas, may not have enough fuel to run its power plants. Economic Development Minister German Gref estimated that the gap between consumption and production in the domestic market could reach six billion cubic meters of gas between 2007 and 2009. Gas is the main fuel used to run Russia’s power plants.

Meanwhile, Chubais warned that UES’s reforms are long-term and will not prevent the looming energy shortage. So local leaders are gearing for winter and possible blackouts.

In a September city hall meeting, Moscow Mayor Yuri Luzhkov called for a citywide energy conservation program to cope with the capital’s expected 20-percent shortfall in supply, The Moscow Times reported. Power shortages debilitated Moscow last winter, and a major blackout in May 2005 reportedly cost the city around $1 billion.

Luzhkov’s top proposal is to replace 2.2 million inefficient bulbs throughout the city, which would save Moscow 88.5 megawatts a day. Luzhkov also urged city officials to impose energy consumption caps on households. 

Among other measures, Luzhkov mentioned installation of more efficient lighting in schools, hospitals and metro stations. He also ordered retail kiosks using electric space heaters to be cut off from the grid. This program is likely to be mimicked across the country.

Russia, meanwhile, may have an unexpected ally in this energy battle. Ukraine, with whom Russia had a bitter spat over gas supplies this past winter, said it has five million kilowatts of spare power plant capacity.

Help would come in exchange for gas, which Russia would supply to Ukraine’s power plants. An agreement between the two countries could be signed as early as October.