The six banks that turned down the chance to work with Intertechelectro-New Generation on Russia's first project financed power plant might end up regretting it if the company succeeds in its ambitious plans to project finance up to five projects worth around US$800 million in the next five years

Intertechelectro-New Generation's 124MW Noyabrsk gas-fired CHP plant is the ideal project to serve as a market tester for risk in the Russian power sector due to its relatively small price tag - around US$230 million - as well as boasting a strong supplier and offtaker.

The power plant is being constructed in Noyabrsk, a town in Northern Siberia located on oil fields that are owned and operated by Gazprom Neft.

Infrastructure Journal was invited by Intertechelectro-New Generation to attend the ground-breaking ceremony with Russian energy minister Viktor Khristenko.

Good place to start

Last summer, Gazprom Neft was forced to cut back its production due power shortages and decided to commission its own captive power plant in a bid to hedge it from potential brownouts.

Gazprom Neft had an urgent need to shift its dependence from the Russian power grid and resolve the problem quickly. This meant that New Generation had just two years to build the plant, with construction starting last week despite the developers not expecting to reach financial close until May.

In fact, New Generation is yet to sign a PPA with Gazprom Neft but that is expected to be concluded before the end of the month and, with the company in need of more power to continue its oil field operations, negotiations should not be problematic.

Supplying the power station with fuel is perhaps the riskiest part of the equation for a gas-fired project in Russia due to the price disparity of supplying gas domestically and exporting it.

This has led the energy giant to threaten to cut off supplies to some gas-fired plants to receive a better price for its product, but this should not happen in Noyabrsk as the offtaker is a Gazprom subsidiary.

New Generation will seek a fixed spark spread - the difference between the cost of the gas and the offtake price - with the gas and electricity prices tied to inflation.

These factors must have impressed BNP Paribas which currently has an advisory mandate to help New Generation obtain the loan of US$150 million needed to complete the project.

Still facing challenges

Temperatures during the Siberian winter can plummet to as low as minus 61 degrees Celsius and the two GE 6B combined cycle units had to be guaranteed for operating in those conditions.

Fortunately EPC contractor - Moscow-based EMK Engineering - is well used to operating in these conditions in locations as remote as Siberia. It was rated by an independent analyst as one of the best in the world at building on frozen ground.

Konstantin Trushin, EMK Engineering's deputy general director, said that some of the problems posed by the Noyabrsk project included equipment delivery and the supply of workers to such a remote location.

New Generation did not appoint EMK Engineering through an open bidding process but said that this would change for future projects. The company is already compiling a database of potential EPC contractors for its next project which will be open to foreign firms.

After more than a decade with no new power plants being built in the country, Russia has been left with a severe lack of generating capacity. This break from production has also left Russia struggling to find the manpower to construct, run and advise on power projects of this kind.

As a result, New Generation has turned to E.ON UK for technical assistance and also to review its financial plan before it even approached BNP.

Financing

Russia is an investment grade country yet carries with it a certain amount of political risk that makes investors nervous.

While the financing structure is yet to be finalised, there will be built-in mechanisms to mitigate risk exposure to currency fluctuations and the pricing will reflect the risk involved in operating in an untested legal environment.

Financing is expected to have a debt:equity ratio of 70:30.

Pricing for the deal has not yet been set but it will reflect the risk involved in being the first player to enter the Russian project finance power market.

Pricing on the next project financed power deal in Russia is unlikely to be as high as the first one due to increased competition from banks that are now gaining confidence from the project's progress and are understood to be building relationships to target the country's fledgling IPP market.

The loan will be repaid on a 10-year term plus the two-year construction phase.

BNP will go to the market in March to test hunger for syndicated debt. The ticket size has yet to be set.

Next up for New Generation

New Generation plans to finance all of its upcoming projects on a non-recourse basis. The next one is the 350MW Tyumen CHP plant and it is also working on a 500MW CHP plant in the Kurgan region.

Both projects are in the pre-negotiation and research phase.

These projects will be a little more risky in that they will not have a mono-user like Noyabrsk but will sell the electricity to a wholesaler.

For future projects, New Generation is studying the possibility of bringing on a co-investor in the form of a large power generating company with knowledge of IPPs as well as having an exit strategy in 5-10 years.

New Generation is willing to give up a minority stake in future projects and would also consider giving up a blocking stake.

The new projects will focus on using CCGT technology and all of them will combine heat element given that it only adds 10 per cent to the project cost and is an essential social service.

Conclusion

Banks too timid to get involved in the Noyabrsk project will be encouraged by the Noyabrsk project's progress and will look to take advantage of the opportunities that abound in project financing the development of Russia's power sector.

RAO UES has plans for 5,000MW of project financed power projects and there will also be plenty of money to be made from other projects merchant power projects like Noyabrsk.

New Generation might be the first IPP to tap into the potential of building generating capacity in Russia's newly deregulated market but it certainly will not be the last.

Companies and the government alike are promising massive investment in upgrading the dilapidated power infrastructure that is preventing Russia's economy from reaching its full potential.