The government doesn’t expect electricity demand to return to pre-crisis levels until 2012, but is demanding private power generators start meeting their promises to build new capacity.

Private power generators will have to launch nearly 4 Gigawatts of new capacity next year. That’s a major challenge for cash strapped investors in the midst of an economic downturn. But Energy Minister Sergey Shmatko made it clear – Russia’s power generating infrastructure needs modernization, even before last months hydro plant catastrophe.

“During the privatisation of energy assets, companies undertook certain obligations. We decided to renegotiate the agreements on energy supply – in a stricter form. On the other hand, we will update them to take account of possible delays in the launch of certain units and their possible relocation due to the changes in energy needs and the economy over the past two or three years. The nominal amounts of investment and power capacity we plan to introduce will remain unchanged.”

Following the dissolution of power monopoly, UES, private generators signed contracts with the state agreeing to launch new capacity or face fines. That was before the credit crunch made funding far more difficult and the economic downturn riddled electricity demand. Those companies now say that reduced demand means they are struggling to raise funds to meet those investment obligations. But David Herne, Director of Specialised Asset Management, says they're misleading.

“They raised significant capital through the IPO process, some of the companies wasted or stole some of that fund. Most of the money however was used sensibly. In some companies there are massive cash piles and generally across the country there should be adequate cash to bring on the capacity that was planned.”

The government says the power industry is recovering – but slowly. Electricity demand will is only expected to return to pre-crisis levels only by 2012. That means power companies who committed to build new capacity may have more time to fulfill their investment plans – but take longer to earn a return.