Electricity generation is expected to decrease against the backdrop of a decline in consumption by industrial production.
Gradual worsening of payment discipline in terms of paying for consumed electricity, especially among the population and small business.
Gradual decline in the reliability of the energy sector related to limited access to foreign equipment and technology.
Delay in adjusting tariffs amid higher inflation will lead to a decline in business profitability and, as a result, a forced reduction of investments in the sector.
Electricity consumption in Russia’s UES grew by 2.4% from the start of 2022 to May 16, 2022 compared to the same period in 2021. In ACRA’s opinion, this was mainly due to colder weather at the start of this year.
Figure 1. Electricity consumption in the UES of Russia, 2022 vs. 2021
Sources: NP Market Council, ACRA
Nevertheless, ACRA expects electricity consumption to decline in H2 2022, driven by the decline in industrial production caused by the closure or suspension/downtime of enterprises due to most foreign producers and investors leaving the market, as well as sanctions-induced pressure on specific areas of production. At the same time, the depth of this decline in consumption is rather hard to predict due to the rapid and often unpredictable development of the current situation.
Besides potential negative trends related to demand, growth of overdue debt for supplied electricity is also taking place. In Q1 2022, debt in retail electricity markets increased by 0.5% to RUB 335 bln.
Therefore, this year the electricity generation sector will face a decline in consumption and moderate growth of non-payment for supplied electricity, which will undoubtedly impact the credit quality of electricity generating companies due to their financial indicators deteriorating. In addition, the economic and technical feasibility of new investment projects in the sector can be questioned. The current cost of borrowing may make new projects not financially feasible, and the inability to purchase specific foreign equipment may lead to both a decline in technical characteristics and the impossibility of carrying out projects. Due to this, it is highly likely that companies will downsize their investment programs to the minimum necessary to maintain system reliability this year. Electricity generating companies may also face difficulties carrying out scheduled repair work. Against this backdrop, a concept is currently being considered according to which the use of foreign gas turbines, the maintenance of which is complicated, will be minimized. This will result in less efficient equipment being deployed, which in turn may lead to higher prices in the energy markets.
Despite the formation of these unfavorable trends, ACRA assumes that in the short term (up to a year), the sector will be able to absorb negative shocks and at the least maintain high system reliability. The credit quality of the largest generating companies will most likely be maintained within the current parameters, and will decline a lot slower than in the sectors that have been impacted the most by sanctions.
The electricity transmission and distribution sector is undergoing similar trends as the ones that are dominating the electricity generation sector. The expected decline in electricity consumption and cost inflation will serve as negative factors that lead to falling operating cash flow. In addition, inflationary pressure and disruption of supply chains may result in a substantial increase in the cost of strategic investment projects and the postponement of their commissioning. Besides this, financing investments using new borrowings is difficult given the high key rate and will only be feasible for highly profitable project and projects backed by government support. In the current conditions, ACRA expects companies to concentrate more on maintenance investments.
However, it is possible that negative effects may be partially mitigated by the government’s measures to support the electric grid system. In particular, capital injections for key companies, lending at preferential rates, adjustment of tariffs in order to compensate for inflation, and easing in terms of penalties for postponing commissioning dates and for failure to implement investment programs in full in 2022–2023 are being discussed.
The latter may be especially relevant for ROSSETI PJSC and its subsidiaries, especially PJSC FGC UES. The Agency estimates that as of the start of the year, under the consolidated investment program, it was supposed to invest about RUB 900 bln (excluding VAT) in grid infrastructure in 2022–2024. Around half of these funds are to be used for investments in mainline infrastructure, in particular, the implementation of projects to expand the electrification of the BAM and the Trans-Siberian Railway. In order to compensate for the investment costs of these projects, back in December 2021, the annual electricity transmission tariff growth was increased to 6.3% from July 1, 2022 (previously this increase was 5.5%). ACRA expects that this tariff will be in place at least until the end of the current year. Similar major projects are not planned for distribution networks, so the average tariff growth for 2022 was approved at 3%, which corresponds to growth in previous years. Further growth of tariffs continues to under discussion, and a final decision will be made toward the end of this calendar year based on the updated investment budget and actual inflation figures. ACRA does not rule out significant tariff growth, given the macroeconomic inputs. However, it is noteworthy that this issue continues to be socially important and politically motivated, and the government may lean toward other forms of support to avoid passing the cost directly on to consumers.
Figure 2. Annual indexation of electricity transmission tariffs
Sources: ACRA’s inflation forecast, information from FGC UES on tariff growth