WORLDWIDE MARKET RESEARCH REPORT - CISE

EC/IST FP6 Project No 026920
Work Package: 6
Type of document: Report
Date: 20.12.2007
File name: OP_WP6_D37_V1.0.doc Version: 1.0
Title: Worldwide Market Research Report 181 / 356
[E27] Worried by resurging inflation, the Russian government scrapped its plan to allow the
Federal Energy Commission to fix tariffs for gas, power, and railways.
Electricity throughout the former Soviet bloc is heavily subsidized. Governments are
reluctant to raise prices to realistic levels lest they incur the wrath of their impoverished
subjects and reignite dormant inflation. Fuel prices, government taxes, and variable costs,
such as labor, have been rising steeply in the last decade but the electricity behemoths'
ability to amend their tariffs to reflect these is politically curbed.
The Russian Unified Energy Systems electricity monopoly was allowed to up its prices this
year by a mere 14%, barely the rate of Russian inflation. Its chances to attract the $50 billion
in investments it says it needs in the forthcoming 10 years are slim as long as it continues to
charge its customers (both wholesale and retail) a fraction of the cost of electricity its West
European counterparts charge theirs. A restructuring plan, approved by the government in
May 2001, is going nowhere. The sale of loss making generating plants (even at bargain
basement prices and to insiders) is impossible without a massive (and massively unpopular)
boost to electricity prices.
Vociferous protests in Croatia last month forced the government to shelf a scheduled 9%
hike in the price of electricity for domestic consumption. The IMF is displeased with the
government's stranglehold over the energy sector and is pushing for liberalization. Slovakia's
news agency, TASR, reported that thousands of members of the Trade Unions
Confederation demonstrated in Bratislava against proposed budget cuts and increases in
regulated prices, including electricity's.
Still, consumers will not be able to buck the trend forever. Even the rich countries of the
region are facing already unsustainable electricity subsidy bills. The Slovenian news agency,
STA, reported that Slovenian producers of electricity and natural gas warned that (once the
domestic market opens to foreign competition) they will be at a disadvantage due to the
unrealistic electricity "price model".
Yet, liberalization and privatization have acquired a bad name after the debacles in
California and elsewhere in the world. Moreover, electricity generation depends on a free
market in fuels: a rarity in central and Eastern Europe. Prices cannot rise above the increase
in net disposable income.