Russia power firms turn away from coal as cost surges

By Simon Shuster and Jackie Cowhig

MOSCOW, July 7 (Reuters) - Russian power producers expect coal prices to follow the cost of gas sharply upward in the coming years, and are switching away from coal as much as possible, said the head of one of Russia's largest power firms.

Vladimir Khlebnikov, the head of OGK-1 (OGK1.MM), the country's second-largest fossil fuel-run generator, said on Monday the problem had forced his firm to revamp its development plans, converting some coal-run turbines to gas-fired ones.

The reason for the soaring coal prices are twofold, he said. A lack of transport infrastructure leaves consumers with little choice of supplier, and the available suppliers in each region have strong pricing power.

This has made it very difficult to agree a long-term supply contract for coal, Khlebnikov said.

"We always try to have open and competitive negotiations (with coal firms), and over the course of the past three years we have failed," he said on the sidelines of a news briefing.

The problem is also historically rooted in the Soviet Union, where power stations were linked to one specific coal field for their supplies. "Nobody was thinking about competition back then... Building coal-based power plants in this atmosphere is insane."

Another inheritance from the Soviet Union are Russia's state-capped prices for energy and fuel, and one major coal supplier argued that the power sector needed to get used to market-driven prices.

"Nobody is crazy about oil prices right now but for some reason the power plants think their fuel prices should be governed by a different mechanism than supply-demand, as is the case for oil and gas," he said.