Trading in the Russian Federation and Europe
Description of business
PJSC Inter RAO is the sole participant in export and import operations on the Russian Wholesale Electricity and Capacity Market. The Company also provides electricity supplies abroad from the subsidiary JSC Eastern Energy Company and a third-party company as an agent. The Group’s trading companies in the countries of Northern Europe and the Baltic States carry out trading operations for the purchase and sale of electricity on the unified exchange platform Nord Pool and Nasdaq OMX Commodities and on the national exchange PolPx in Poland.
The ‘Trading in the Russian Federation and Europe’ segment consists of eight companies that trade in electricity and capacity. Electricity is supplied under commercial agreements, including supplies under agreements/contracts on parallel work with foreign energy systems and emergency mutual assistance agreements.
In May 2019, the trading Company LLC Inter RAO Georgia was registered.
Several years of experience in conducting foreign economic activities on the markets, a well-established system of interaction with partners, and the optimal structuring of proposals for contracts that take into account the demands of counterparties as much as possible.
State of the segment on the Trading Operations market of the ‘Trading’ segment in 2019, mln kWh
Electricity sales in the segment during the reporting period were 696 mln kWh lower than the 2018 level (2.9%), which can primarily be attributed to a decrease in electricity sales in the Russian Federation (-3.519 bln kWh) due to the lack of commercial supplies from Kazakhstan. At the same time, positive trends were seen in the sale of electricity in Lithuania (+1.112 bln kWh) and other supply lines, including to Kazakhstan and Georgia (+1.924 bln kWh).
The main destinations for Inter RAO’s exports across the border of the Russian Federation in 2019 were Finland (36.3% of total exports), Lithuania (32.5%), China (16.0%), and Kazakhstan (7.4%).
The total volume of trade-based export-import operations by Inter RAO amounted to 21 bln kWh.
| 2017 | 2018 | 2019 | 2018/2019, % | |
|---|---|---|---|---|
| Electricity sold, including | 25,108 | 24,195 | 23,499 | – 2.9% |
| Russian Federation | 6,230 | 5,122 | 1,603 | –68.7% |
| Finland | 5,578 | 7,476 | 7,291 | –2.5% |
| Lithuania | 3,698 | 5,315 | 6,428 | 20.9% |
| Belarus | 2,733 | 49 | 31 | –37.0% |
| China | 3,319 | 3,109 | 3,099 | –0.3% |
| Other countries | 3,550 | 3,123 | 5,047 | 61.6% |
| Electricity export via the Russian border | ||||
| Total exports, including: | 16,699 | 16,712 | 19,338 | 15.7% |
| China | 3,319 | 3,109 | 3,099 | –0.3% |
| Finland | 5,040 | 6,903 | 7,023 | 1.7% |
| Lithuania | 3,131 | 4,415 | 6,286 | 42.4% |
| Belarus | 2,733 | 49 | 31 | –37.0% |
| Kazakhstan | 1,294 | 1,347 | 1,437 | 6.7% |
| Other countries | 1,182 | 889 | 1,461 | 64.4% |
| Electricity import via the Russian border | ||||
| Total imports, including: | 6,230 | 5,122 | 1,603 | –68.7% |
| Kazakhstan | 5,736 | 4,825 | 1,243 | –74.2% |
| Georgia | 262 | 97 | 59 | –38.9% |
| Other countries | 232 | 200 | 300 | 49.7% |
Revenue in the segment grew by 4.9% mainly due to the performance of IRL Polska and IRAO Lietuva due to favorable price conditions on the Nord Pool power exchange in Lithuania, growth in exports from Russia, an increase in sales in Poland and Georgia as well as the impact of selling prices in all destinations expressed in ruble terms as a result of growth in the euro in the first half of 2019 compared with 2018.
The 10% growth in electricity purchase costs in the segment was mainly due to increase in the volume of electricity sales in Lithuania, Poland, and Georgia, which was partially offset by a decrease in import purchases by PJSC Inter RAO from Kazakhstan.
The 10% decrease in electricity transmission fees in the segment can be attributed to a decrease in expenses in ruble terms by RAO Nordic Oy due to a reduction in the tariff for electricity transmission and an increase in PJSC Inter RAO’s expenses as a result of an increase in electricity exports.
The 9.8% increase in the segment’s EBITDA resulted from an increase in margin profit, primarily in Lithuania, Poland, and Georgia due to growth in the volume of electricity sales, an increase in market prices in the Nord Pool market as well as the ruble equivalent of the export electricity sale price due to growth in the euro and the U.S. dollar against the Russian ruble in the first half of 2019 compared with 2018.
| Indicator | ‘Trading in the Russian Federation and Europe’ segment | |||
|---|---|---|---|---|
| 2017 | 2018 | 2019 | 2018/2019 | |
| Revenue, RUB mln, including | 58,618 | 73,495 | 77,107 | 4.9% |
| Finland | 11,134 | 24,824 | 21,876 | –11.9% |
| Lithuania | 8,818 | 18,163 | 20,466 | 12.7% |
| China | 8,315 | 8,755 | 8,736 | –0.2% |
| Russian Federation | 13,956 | 11,898 | 8,217 | –30.9% |
| Poland | 793 | 1,356 | 6,841 | 404.5% |
| Latvia | 861 | 795 | 897 | 12.8% |
| Belarus | 7,557 | 137 | 89 | –35.0% |
| Other | 7,184 | 7,567 | 9,985 | 32.0% |
| Share in Revenue of the Inter RAO Group, % | 7% | 8% | 8% | 0 p.p. |
| Purchased electricity and capacity, RUB mln | (44,890) | (48496) | (53,340) | 10.0% |
| Electricity transmission fees, RUB mln | (5,537) | (7402) | (6,659) | –10.0% |
| EBITDA, RUB mln | 7,445 | 16,309 | 17,915 | 9.8% |
| EBITDA margin, %EBITDA margin was calculated excluding inter-segment revenue in the ‘Trading in the Russian Federation and Europe’ segment in the amount of RUB 1.424 bln for 2019, RUB 2.053 bln for 2018, and RUB 2.268 bln for 2017. | 13% | 23% | 24% | 1 p.p. |
| Share in EBITDA of Inter RAO Group, % | 8% | 13% | 13% | 0 p.p. |
Expectations for demand, volume, and price conditions
In 2020, there may be changes in volume, price conditions, and demand trends in certain markets where the Company operates compared with 2019. For example, there has been a significant decrease in prices on the NordPool market in the Finnish and Baltic zones in early 2020, which is mainly due to a decrease in consumption and growth in renewable energy production in the NordPool regions resulting from the influence of weather factors (unusually high temperatures, strong winds, and a large amount of precipitation). In general, prices and demand for 2020 are expected to be at the level of the average annual indicators for the period of 2015–2019. As regards Lithuania’s announced closing of the Lithuania-Belarus section for commercial electricity supplies, it is worth noting that after the position stated by the Cabinet of Ministers of the Republic of Latvia on transferring electricity trade with third countries (Russia, Belarus) to the Latvia-Russia border and after the closing of the Lithuania-Belarus border, we plan to maintain the share of electricity exports from Russia to the Baltic region. Given the favorable pricing environment, sales volumes to Georgia may also grow.