MOSCOW -- Russia's electricity monopoly is launching a drive to attract $79bn of investment, mostly from private investors, into the country's overstretched electricity sector over five years, in the biggest infrastructure upgrade since Soviet times.

The investment plan devised by Russia's Unified Energy System was made possible by a breakthrough government agreement last week to introduce market mechanisms into wholesale electricity prices after decades of state regulation kept them well below international levels.

President Vladimir Putin this year approved plans to attract foreign and Russian capital into power generation. That should lead to initial public offerings or share placements by 20 generating companies that UES is spinning off after a huge restructuring. The first IPO will come in November.

The power sector shake-up is vital to underpin continuing economic growth in Russia, which has averaged more than 6 per cent a year since 1999. It is also one of the few large-scale liberal reforms still alive in the country. Gradual price rises towards world levels will make private investment potentially attractive in both existing generators and new generating projects.

The government was finally persuaded to take the decision to start liberalising prices by power shortages that caused supply restrictions in Moscow, St Petersburg and the Urals during a record cold spell last winter. A substation fire also triggered a blackout in Moscow in May 2005.

Anatoly Chubais, UES chief executive and architect of Russia's mass 1990s privatisation programme, warned that the country would still face power shortages for the next two or three winters because of delays in approval for his electricity reforms.

"Problems with shortages will be extremely serious. It would have been good if the decisions on reform that have been taken now could have been made at least a year or two earlier. [But] introduction of a real market is a fundamental prerequisite for moving into a new epoch in electrical power in this country."

Under the liberalisation decree, a gradually increasing proportion of Russia's wholesale market will be priced freely through bilateral contracts between consumers and power companies. Free prices will also operate for all new generating capacity. Mr Chubais is travelling to New York, Stockholm and London in the next week to woo strategic and portfolio investors.

UES is being split into monopoly activities such as the national grid and dispatching functions, which will be government-controlled, and competitive activities including generating and electricity retailing. The Rbs2,100bn ($79bn, €61bn, £41bn) investment programme is split between generation, aimed at delivering 21,800MW of new capacity within five years, and electricity distribution.

Six large coal, gas and oil-fired generating companies and 14 smaller regional generating groups will hold IPOs or private placements for strategic investors, or a combination. Investors will also be able to buy stakes in generating companies held by UES. Some foreign investors had applied to build generating projects themselves, Mr Chubais added. Two projects worth at least $1bn (€770m, £525m) involving European companies were likely to be announced within months.

Investors in generation in regions with extreme weather or geographic conditions, such as parts of Siberia, will be offered "guaranteed investment". This will ensure they are compensated even if electricity prices are below the level needed to recoup their investment, during a transition period. Source: Financial Times