| MOSCOW, July 7
MOSCOW, July 7 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
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
"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.
He acknowledged, however, that using coal might not make
sense for some consumers in the current environment. "It's
realistic that some of the utilities would prefer not to switch
In the sphere of coking coal, which is used by steel mills
as opposed to the power sector, Russia's competition watchdog
has already launched an investigation into price inflation.
"The inquiry is of the most serious nature, and if
violations of anti-trust laws are uncovered, the violators will
face harsh sanctions and fines on their income," the Federal
Antimonopoly Service said in a statement upon opening the
investigation in May.
Electricity officials say that the situation on the coal
market is causing a sector-wide shift away from coal-based power
In 2006, then-President Vladimir Putin approved sweeping
changes to the energy sector's fuel balance, including a plan to
make coal account for 37 percent of the fuel used at power
plants by 2015, up from 28 percent today.
But since the trend of rising prices has become clear,
generating firms have protested the changes and are refusing to
"Generation companies are cutting down their original
programmes of commissioning of new coal-fired generation
capacities," said Igor Kozhuhovsky, head of the economic policy
department at former power monopoly UES, which founded most of
Russia's generating firms.
Traditionally, coal-run turbines are up to twice as
expensive as gas-fired ones, but the relative cheapness of coal
made them a good investment in the long-run. With the price of
coal catching up to gas, however, this is not always the case
Kozhuhovsky was speaking at one of the last public events
for UES, or Unified Energy System, before the Soviet-era
monopoly was liquidated on July 1 as part of a sweeping reform
of the sector.
Instead of putting on line 36.1 gigawatts of new coal-run
capacity by 2015, Kozhuhovsky said that power producers are
installing 19.2 gigawatts, cutting the original plan nearly in
Moreover, by discouraging power producers from building
coal-fired generators, coal companies are hurting future demand
for their own product, he said.
"The new forecast for the growth of coal prices bears
witness to the decreasing competitiveness of coal in the
In the short-term, however, they will be charging much more
for the fuel, the cost of which will grow 25 percent in 2008,
the same as the price of natural gas, according to forecasts
from the Industry and Energy Ministry.