Moscow February 13, 2007 Anatoly Chubais Chairman of the Management Board RAO UES of Russia Energy Industry: Retarding or Driving Force for Economic Advancement?

2 Economy Energy Industry Demand DevelopmentRetardation Energy Industry: Needs of the Economy Energy Industry: Market Reform and Development Strategy Energy Industry: Impetus to Economic Sectors Main sections of this Presentation: Energy Industry: Retarding or Driving Force for Economic Advancement?

3 Electricity Consumption: Approaching Historical Highs Source: Forecasted Balance of Electricity and Capacity for (baseline scenario); RAO UESR estimates Needs of the Economy Average annual rate of growth in : 1.7% Average annual rate of growth in 2006: 4.2% 1990 level kWh in billions

4 Peak Load Regions: Exceeding the Electricity Consumption Peak of the Soviet Period Needs of the Economy

5 Source: Resolution of the Russian Government of November 30, 2006; RAO UESR estimates : Changes in Electricity Consumption and Required New Capacity For reference: new capacity commissioned in Russia in – 23.3 GW, maximum annual commissioning of new capacity in Russia in the Soviet period – 8.9 GW (1985) kWh in billions 984 1,035 1,086 1,134 1, ,000 1,100 1,200 1, Average annual increase in : 5.0% Change in demand trends Exhaustion of generation additions using existing capacity Dramatic growth of demand for new capacity Revision of Investment Program for the energy industry: from 23.4 GW to 40.9 GW Needs of the Economy

6 What makes this possible? Effective demand Reform of the energy industry: turning into a competitive sector Development strategy: strategy finalization

7 Reform of the Electric Power Industry: National Policy Natural monopolies GOALS: to reorganize infrastructure for market operations to ensure nondiscriminatory access to grids Dispatching Main grids Distribution grids Competitive sectors Electricity sales Generation GOALS: to create market players to transfer to market pricing principles Market rules Regulated tariffs Government as regulator Essence of the reform: separation of monopolistic and competitive sectors Energy Industry: Reform and Development Strategy

8 RAO UES of Russia: Pre-reform Structure Russian Federation Minority Shareholders of the Parent Company Generation GridsSales 73 AO-Energos High Voltage Grids + Grid Services Centralized Dispatching Administration 32 Federal Power Plants 52% 48% RAO UES Energy Industry: Reform and Development Strategy

9 Russian Electric Power Industry: Target Structure MonopoliesCompetitive Sectors Private shareholders Government Wholesale Generation Companies (6) FGC System Operator IDC Holding Company Central North- West Ural and Volga Siberia Hydro WGC (1) Rosenergoatom FGC – Federal Grid Company IDC – Interregional Distribution Company Territorial Generation Companies (14) Engineering Centers Sales Companies Competitive Market Energy Industry: Reform and Development Strategy Independent Generation Companies

10 Investment Deployment Concept for the Electric Power Industry Reform Concept Investment Deployment Concept Investments from the state budget Competitive sectors (primarily thermal generation) Private investments Monopolistic sectors Energy Industry: Reform and Development Strategy

11 Investment Mechanisms Competitive sector (thermal generation, sales, services) Revenue from sale of assets Investment Guarantee Mechanism Loans and advances Additional issues of shares in WGCs and TGCs in favor of private investors Direct private investments in local projects Monopolistic sector (grids, dispatching) Loans and advances Additional issues of shares in FGC, SO, and HydroWGC in favor of the Government Funds from the federal budget Payment for technical connection to grids Most investment mechanisms result from the energy industry reform and market creation Own funds Revenue from sale of assets Own funds Energy Industry: Reform and Development Strategy

12 180, , , , , , , , , , , , , , Investment Program of RAO UES Holding Company: Scope and Mechanisms Total in : 3,099,920,000,000 rubles Own funds Other Special purpose investments Long-term projects for expansion of the Investment Program Funds from external investors for projects under IGM Federal budget Revenue from sale of assets Payment for technical connection Issue of additional shares Raised funds Accumulation fund, accumulated own funds 28.3% 14.7% 12.6% 8.7% 8.4% 7.2% 4.8% 4.5% 1.2% 9.4% 0.2% rubles in millions Step-by-step increase in the share of electricity sold at nonregulated prices, % Energy Industry: Reform and Development Strategy

13 Additional Issue of Shares in WGCs and TGCs: Key Mechanism of the Investment Program RAO UESR Administrative Order No. 914 of December 20, 2006 WGC-1 WGC-2 WGC-3 WGC-4 WGC-5 WGC-6 TGC-1 Mosenergo (TGC-3) TGC-4 TGC-5 TGC-7 TGC-8 TGC-9 TGC-10 Kuzbassenergo (TGC-12) TGC-13 List of companies issuing additional shares: Companies whose Programs for Preparation and Placement of Additional Shares are approved by the Board of Directors of RAO UES of Russia Overall assessment of funds raised from additionally issued shares in : billion rubles – total for WGCs billion rubles – total for TGCs Total: billion rubles Energy Industry: Reform and Development Strategy

14 Prospects until 2030: Targeted Vision, General Layout, Investment Programs General layout of electric power facilities until 2020 Targeted Vision for Development of the Russian Electric Power Industry for the Period Ending 2030 Investment Program of RAO UES Holding Company for year investment programs of energy companies as from Energy Industry: Reform and Development Strategy

15 Capacity Commissioning Program MW Thermal generation WGCs, TGCs, RAO UESR 1,1961,4741,5967,57616,97928,821 Small TGC HPPs Hydro WGC , ,929 Other commissionings ,0932,2011,1906,657 Total for Holding Company 1,2542,2802,2349,22019,25534,243 Total commissionings, MW1,6563,0514,32711,42120,44540, ,000 10,000 15,000 20,000 MW Energy Industry: Reform and Development Strategy

: Changes in the Fuel Mix Gas Coal tonnes of fuel equivalent in millions GasFuel oilCoalOther 69% 3% 27 % 1% 67% 3% 29% 1% 60% 2% 37% 1% Energy Industry: Reform and Development Strategy

17 New Technological Structure in the Electric Power Industry Transmission Implementation of Flexible AC Transmission Systems (FACTS), new DC transmission technologies (DC Converters), and high-temperature superconductivity technologies Grids become an active element of the energy system, with a capacity to change power and energy flows Grids are a passive element of the energy system Generation Efficiency >50% Efficiency 42-46% Efficiency 34% Efficiency 34% Gas-fired generation: steam-power technology replaced by combined cycle gas technology (CCGT) Coal-fired generation: circulating fluidized-bed technology; Implementation, Innovation, and Reconstruction technology; and super-supercritical technology Hydropower: active development of pumped storage power plants and tidal power plants Radical renovation of data processing technologies based on SCADA-EMS. Creation of 3-tier technological vertical of dispatching centers Creation and servicing of the electricity market, system service market, and balancing market Dispatching Mode control through economic motivation of market participants Mode control using administrative and command methods Energy Industry: Reform and Development Strategy

18 RAO UES of Russia Investment Program – Factor for Power Plant Engineering Development Planned expenses related to purchase of primary thermal power equipment for generation facilities of WGCs and TGCs rubles in billions Total for : billion rubles Purchase orders for construction materials can be placed on the B2B-Energo online trading floor at Energy Industry: Impetus to Economic Sectors

19 Factor for Power Plant Engineering Development as exemplified by Power Machines Share of services in portfolio of orders Generation facilities Share of exports in portfolio of orders more than 80% less than 10% 8 GW % 15% 17 GW Sales $0.68 billion$1.5 billion Corporate Investment Program for : $1 billion ~ ~ 200 ~ Key investment sources ($ in millions) Issue of additional shares in Power Machines Bonded loans and bank loans Sale of assets Energy Industry: Impetus to Economic Sectors

20 … Factor for Electrical Engineering Development Planned expenses related to purchase of high-voltage equipment and materials for FGC facilities (incl. transmission companies) for High-voltage equipment Materials rubles in billions Total procurement expenses for : Equipment: 97.5 billion rubles Materials: 97.2 billion rubles Energy Industry: Impetus to Economic Sectors Purchase orders for construction materials can be placed on the B2B-Energo online trading floor at 8 3, (average annual)

21 tonnes in millions Coal demand in TPP sector (excl. isolated generating plants) for Source: RAO UES of Russia … Factor for Coal Industry Development Increased annual coal consumption in 2010 as compared with 2006: 38 million tonnes (~31.5%) Energy Industry: Impetus to Economic Sectors

22 cu m in billions Source: Resolution of the Russian Government of November 30, 2006 Provision is made that 5-year long-term agreements for transportation of gas from independent producers be signed As from April 1, 2007: transition to 5-year gas delivery agreements with energy companies. Price guidepost: equal profitability of gas sale both in the domestic market and for export in 2011 … Factor for Gas Industry Development Gas deliveries to energy companies for Increased annual gas consumption in 2010 as compared with 2006: 43 billion cu m (30%) Energy Industry: Impetus to Economic Sectors

23 Source: research by Progressor at the request of RAO UES of Russia (preliminary estimates) … Factor for "Secondary Processing" Development as exemplified by the construction materials sector tonnes in millions rubles in billions Demand for cement of TPPs and HPPs of the Holding Company: new construction and technical upgrading: 7.2 million tonnes Cement expenses of TPPs and HPPs of the Holding Company: new construction and technical upgrading: 19.2 billion rubles Energy Industry: Impetus to Economic Sectors Purchase orders for construction materials can be placed on the B2B-Energo online trading floor at (annual average) (annual average)

24 Source: research by Progressor at the request of RAO UES of Russia (preliminary estimates) … Factor for R&D and C&I Development Research and development (in thermal power industry only): 43.5 billion rubles Construction and installation (in thermal power industry only): billion rubles rubles in billions Orders for R&D and C&I can be placed on the B2B-Energo online trading floor at Energy Industry: Impetus to Economic Sectors (annual average) (annual average)

25 Cooperation with the Industry-Related Higher Education Institutions … Factor for Science and Education Development March 2006: Agreement for Cooperation signed between RAO UES of Russia and the Russian Academy of Sciences  Development of the Targeted Vision of Development of the Russian Electric Power Industry for the Period Ending 2030  Research to create new competitive equipment for energy companies  Development and mastering of new technologies Major Areas of Joint Activities Recruitment of graduates from higher education institutions Programs for personnel training, retraining, and advanced training Corporate scholarships and contests Energy Industry: Impetus to Economic Sectors

26 Reform of the electric power industry turns it into a driving force for economic advancement Economic advancement Economic retardation Economy Electric power industry Demand Reform of the Electric Power Industry