Moscow. 27 August INTERFAX - In a business climate of sanctions-related tension and rouble instability, Viktor Vekselberg's Renova is poised to win a share of the market from Siemens, GE and Alstom. One of the company’s most promising areas is the online monitoring of turbines, the data from which is to be relocated from the United States, Europe and Japan to Russia.
The company also plans to participate in tenders for the supply of turbines to new power plants, including projects in the Kaliningrad region involving resources from Rosneftegaz for their construction.
Renova is ready to test the export potential of Russian equipment, and is considering projects in Africa and India. The company will be collaborating with Rosnano (MOEX: RSNN) on the renovation of the Hevel factory, and soon will start exporting solar power modules. Mikhail Lifshitz, Renova Group’s Director for High-Tech Assets Development and General Director of ZAO ROTEC, told Interfax that that the group is upbeat about further expansion in Europe.
- You are Renova's director for high-tech assets development. What is your area of business all about today?
- Primarily we manufacture machinery at our subsidiaries ROTEC, Ural Turbine Works, the Hevel solar panel factory, and TEEMP, whose profile is engineering and development in the field of gearless electric drives and electrical energy storage systems (supercapacitors). This also includes the Russian divisions of Swiss machine-building firms Sulzer and Oerlikon, in which Renova holds significant stakes. If we are talking about the strategic level, this includes the search for new directions in technology, areas which either look promising on their own or which will have a synergistic effect on the group’s existing assets. Besides, Renova is constantly working to improve the technological level of all the businesses under its management.
- Are there any plans to expand the portfolio?
- We have a development plan for each asset, and we also have acquisition programs in place. As an experienced investor, Renova is continuously looking for new investment opportunities. Recently, we acquired Octo Telematics, a global leader in insurance telematics services, transport management, and logistics.
- How ready is Renova to invest in high-tech businesses?
- I wouldn't put the question that way. If we see a business that we believe is synergetic with our portfolio, we’ll begin to explore how we can participate in it. Of course, individual business areas can be judged from the perspective of the investment of free money. But the challenge facing the entire group is of a rather different nature. The main priority is to occupy a space in every market we operate in, a space that we believe we’re worthy of.
- Does the company have any plans for acquisitions outside Russia?
- I cannot speak for our shareholders, but in the business sphere that I’m responsible for, which is divided approximately 50/50 between "Russian" and "non-Russian," we see no limitations on our activities in Europe. A different matter is that at the moment it’s difficult to choose, because right now the machine-building sector is not in the best of shape, and markets are turbulent not just in Russia but in Europe as well.
- Renova and GE (US) signed a cooperative agreement on manufacturing low-power steam turbines at the 2015 St. Petersburg International Economic Forum. Could you tell us about your cooperation with GE in more detail?
- We are currently looking for synergy with a number of market players, such as Siemens and Alstom. With GE, we are interested in two things. First, we would like to jointly manufacture combined-cycle power plants. GE owns a gas turbine manufacturing plant in Russia, and it turns out that in a typical combined-cycle plant with a gas turbine, a steam turbine is an essential component. Our new steam turbine, which we announced in 2011, is an excellent choice for many combined-cycle projects. We have built over 10 turbines of this type so far, which are currently operating at power plants in Izhevsk, Kirov, Perm and other Russian cities, including coupled to GE turbines.
We would like to take a closer look at GE’s small steam turbines and evaluate the prospects for cooperation – either through licensing or contracting.
As a manufacturer of steam turbines, we offer a range of highly competitive 50–300 MW units. However, I must say that our presence in the low-power turbine sector is weak. The reality is that we could develop our own turbine. We have both the design bureau and the resources for this. But it will take time and money. And, in fact, you are facing a dilemma – you should either invent and develop something of your own, or obtain a license and manufacture something that someone else has already developed.
- What other areas of diversification are you interested in?
- Market sectors that interest us include industrial enterprise generation, pulp and paper, metallurgy, and chemistry. PDC Soyuz and we are currently constructing a new power unit with a 60 MW turbine for NLMK (MOEX: NLMK) ).
In terms of geography, we have a presence in traditional places, such as Kazakhstan and Belarus. We completed a major project in Mongolia last spring, and a small project in Serbia. Unfortunately, one market is no longer a near-term prospect for us -- I’m talking about Ukraine. Still, I keep hoping for the best. Kyivenergo plants use T-250 turbines manufactured by our company – the same units that are used at power plants in Moscow and St. Petersburg. But we are developing new markets, moving into places like Africa and India.
- What projects are you interested in there?
- Geothermal projects with a total capacity of 5 GW are being planned in Africa. We are going to bid on these with a Russian engineering company. I am talking about stable countries -- South Africa, Kenya, Tanzania, Rwanda -- where there is money and no one is fighting. These places have underground springs and large aquifers that have been well-surveyed.
Geothermal generation will be based on 70–100 MW power stations. Our 100 MW platform is particularly suitable for a turbine that generates 70 MW. Our design bureau is working on the design of a geothermal turbine. This is all about working with primary steam, so consequently there will be chemical wear, abrasion and so on. Therefore, we need to consider the use of appropriate materials and protective coatings.
- And what about India?
- A lot of countries are not rushing to cover their territories with electrical grids; this attitude has been significantly influenced by developments in renewable energy. India has tremendous potential in the industrial generation sector, which makes India a good market for turbines up to 100 MW for large enterprises.
Breaking into the Indian market is tough -- we need a local partner for this. Truth be told, many Russian businesses have had plenty of negative experiences in this country. Nevertheless, our Swiss partners, Sulzer and Oerlikon, are currently employing 4,500 people at 16 enterprises, and these companies are all running smoothly. We have a real chance here to use the experience of our Swiss partners to introduce our product to the market.
- How are things going with your joint project with Mosenergo (MOEX: MSNG) for the reconstruction of the steam unit at CHP-22 in Moscow?
- The project is in full swing. Come visit the site and you can see everything for yourself. The 300 MW turbine units are really something to see.
- What are the expected dates for installation?
- We’ve performed a comprehensive survey at the power station. First, we have to shut down the unit and dismantle the existing equipment. The installation of the new turbine will be completed in January 2017. According to the project’s timetable, work at the site will begin in March 2016.
- Did you receive any offers from your traditional partner Gazprom Energоholding (GEH)?
- Gazprom Energoholding is one of our key customers for both steam and gas equipment. We’ve signed a big gas turbine service contract with a servicing subsidiary of GEH. Under this contract, we are giving them part of the technology and knowledge that we’ve acquired in this business, and we are also carrying out a large training program for their staff. Almost all the inspections that we carry out for GEH entities involve GEH’s own experts, and the extent of their involvement will increase as they acquire more skills.
- Are there any doubts about passing on your knowledge to them?
- In the spring, we signed a detailed agreement where everything is spelled out in detail. We agreed on a format and a knowledge transfer program. We will disclose exactly as much as we can, and exactly as much as they need. There are some technologies and products in the gas equipment servicing sector which are completely impractical from an economic perspective to have inside a generating company. This is simply because the number of turbines they have will never be able to fully handle their own production capacity.
Traditional work approaches in the gas turbine service sector were formed mainly in the US and Europe, not so much here in Russia. There, people wouldn't even think of retaining a turbine expert when the service company is only 50 kilometers away. With one phone call, a technician can be at your place in 40 minutes. But if your service company is 1,500 kilometers away, which is often the case in Russia, the expert cannot possibly be there in 40 minutes. It will be the next day, in the best case scenario. Our geography and infrastructure are different. Therefore, we must review and update our methods.
- What do you think about setting up a repair and service company jointly with GEH?
- A corporation de jure is a tool. If, at some point, we find it expedient to set up a business unit, we will discuss this. For now, we are working within the framework of our agreements, and we are fully satisfied with how things are going.
- What are the current trends in ROTEC's GT (gas turbine) service order portfolio?
Since the beginning of 2015, ROTEC has concluded 14.3 billion roubles worth of new contracts for the maintenance and service of gas turbines. The company has committed to servicing an additional nine gas turbines: seven Mosenergo power plants (CHP-12, CHP-21, CHP-27) and two power plants at TGC-1's Pravoberezhnaya CHP (MOEX: TGKA). The service contracts were concluded on the basis of competitive tenders. The total value of the group’s portfolio of long-term service contracts has reached 24.9 billion roubles. Today, the company, independently and in partnership with other service companies, provides servicing for 30 gas turbines with a total capacity of almost four GW.
- Was the growth of the services portfolio affected positively by the import substitution policy?
- Import substitution can be an end in itself only in a limited number of situations. Our market is fiercely competitive, and for us import substitution depends on demand. What do you think, if today we were to set up a sailboard factory in Novosibirsk to substitute for imports, how many of them would we sell? Let me guess -- with no wind and water around, we wouldn’t sell any.
Probably there are some aspects of the market that I understand better, like supply and demand, and the quality of service. At our factory we are building a GT hot gas path component line, which would primarily involve the refurbishment of turbine blades and vanes. Currently we have to remove them from the turbines and send them to a company in the Netherlands for repair; we are paying for the logistics. Logistics is the tail that will be cut off if we can do everything locally. Also we will be able to reduce the lead time for our clients by precisely the amount of time needed to transport the equipment.
You could call it import substitution, or you could also call it simply the optimization of our own processes within the conditions of the market in which we work.
- How do you assess the Russian market for repair services? Will it eventually expand? Or will it stagnate due to phase-outs?
- Gas turbines in Russia are a fairly new technology; they won’t be phased out. We expect that our revenue from servicing gas turbines will be 9 billion roubles per annum by 2020.
On the downside, we are negatively affected by exchange rate fluctuations, as our tariffs are “frozen” in roubles, while our credit lines for the purchase of imported gas turbine are in foreign currency. It really hurts the effectiveness of our CSA projects, and has a negative impact on the financial health of our customers.
As for steam turbines, at present a large amount of the work is being carried out by plant personnel. Our work involves not repairing, but rather upgrading steam turbines -- such projects have been carried out jointly with Inter RAO and Generation Company, and many them have been implemented with generating enterprises in Kazakhstan.
If an asset must be phased out, it will be phased out – we can do nothing about it. But still there is still a fairly large fleet of turbines rated at 100 megawatts or more that need to be replaced or upgraded. We have growth potential in this segment.
- Are you ready to offer a lower price than, say, Siemens?
- Price is the last factor in the negotiations. Most importantly, we offer a higher level of service. I am quite serious when I say this. Our experts, both from Russia and from abroad, are trained here, and they are quicker when it comes to responding to a problem. Let me illustrate this. ROTEC's Remote Monitoring and Prognostics Center offers a service for the remote monitoring of turbines. This service used to be carried out mostly by foreign players, that is, direct suppliers of gas turbine equipment. The specialists of our Situational Center are located in the same time zone and speak the same language as our plant personnel here in Russia – which is certainly more practical. All urgently needed spare parts and emergency consumables are stored in Russia, too. We are able to do away with the 'logistics' part of the price, and this is quite a noticeable portion.
The price of our services is denominated in roubles, as well as our costs. In terms of today's exchange rate, our service is significantly cheaper than comparable services in Europe and the US. What’s next? Maybe we’ll wake up and find that the exchange rate is 35 rubles to the dollar.
- Did anyone switch to you from foreign companies?
- We launched our remote monitoring center at the beginning of the year. Of course, we immediately connected the plants of T Plus, which operates within Renova's perimeter; next will be Gazprom Energoholding’s plants.
We are completely autonomous in developing algorithms and models for the remote monitoring center – and this is a costly undertaking, I must say. Not only we are monitoring the current condition of equipment, but we also offer prognoses on when this or that element is likely to fail -- we are able to do this. We have models, a malfunctions database, and a database of events that have led to malfunctions. We take readings at very short intervals in order to be able to calculate trends. The very ability to see and predict events is a very important part of the system that we created.
- What was the amount of investment?
- We have been working for four years, and continue to invest. My estimate is that, as of today, we have invested about $5 million, excluding purchased software.
- Is there a chance that the Ministry of Energy will impose a ban on the monitoring of power equipment by foreign players?
- Rather than banning monitoring by foreign players, the idea is to ban the transmission of data abroad. Any foreign player could establish a monitoring center in Russia and store data in Russia.
I can see two aspects here. First, if you monitor the power unit, which is located next to large enterprises, you can track the specifics of processes at the enterprises and how they work. This is a question of national security as to whether we can afford to have the processes monitored elsewhere, for example, in the US, Europe or Japan. Second, foreign companies collect data primarily for themselves – and are very reluctant to share data with their customers. But if shared, this would help generators operate more efficiently.
Our difference is that we share such data. Our center collects and processes information according to the problems and specifics of the equipment’s operation, then we deliver our report to the customer and advise them on what to do in order to eliminate the problem, and what problems might arise. Foreign service companies rarely do this. They collect information so that their engineers will be ready to repair equipment for a fee when a service call comes in. We are much more open, even to the point that we may turn a customer's laptop into a workstation to provide a plant manager with tools to help them to see how their turbines work.
As for the ban on the transfer of data abroad, I am a supporter of this initiative, because I believe that all data associated with the operation of power equipment must be processed within the country. There was a number of meetings on this topic in the Ministry of Energy. Surely, our Western partners will try to argue – and this is perfectly understandable. But I believe that this decision is absolutely reasonable and must be taken.
Another argument in favor of the decision is that any remote monitoring can work in a two-way direction – you just need to ask a software programmer to make some minor changes in the code. How would you feel if you knew that someone could push a button and stop your car while you are driving? If this tool is located in the country – the state can influence it. If it is located elsewhere, for example, in Singapore – we are facing a problem.
- What are your other projects in terms of business diversification?
- We aspire to take our game to a higher level, and today we are developing production capacity for marine turbines and auxiliaries. In this context, we had to introduce a technology to process titanium, i.e. cutting, welding and boring operations. Arktika, the first post-Soviet icebreaker, will be equipped with our 2x40MW power installation.
- Could you say a few words about new tenders in Russia which are of interest to ROTEC and Ural Turbine Works?
- Now we are bidding, jointly with Siemens, for the reconstruction of Zainskaya GRES in Tatarstan, with outside financing. Besides this, there is a tender for service contracts for Kazan CHP-1, and a few tenders for the supply of spare parts to Mosenergo. We are going to come up with proposals and ideas with respect to embedded generation. We are participating in a number of closed tenders in the Southern Federal District. We plan to participate in the Inter RAO tenders. We are interested in a tender for a Rosatom project, where they plan to turn their boiler into a CHP.
We also plan to participate in the supply of turbines for the construction of power facilities in the Kaliningrad region. Four 230 MW CCGTs and two steam powered units with a capacity of 150 MW will be built there. For UTW, this is the right tender to participate in.
- What are the expectations for ROTEC’s financial performance for 2015?
- ROTEС’s cash flow is expected to be about 4.2 billion roubles, and revenue -- 3.5 billion rubles. We estimate that UTW might generate up to 6.5 billion roubles.
- Renova and Rosnano launched a new factory for the manufacture of Hevel solar cells in February 2015. Could you please tell us what’s happening at the factory six months later?
- Hevel is working at the right pace. The plant will produce approximately 25 MW of new modules by the year’s end. In turn, Avelar is going to build five solar power plants in Russia before the end of the year. We are studying the possibility of upgrading the process line to increase our production capacity.
- What new technology are you talking about?
- The idea is to upgrade the process and improve the efficiency of modules. Two technologies are employed as of today – thin-film technology and traditional crystalline-silicon modules. In thin-film technology we form a 'p-n junction' by depositing an amorphous silicon layer on the substrate. Now, we plan to use a very thin n-type mono-silicone slice of less than 180 microns as a substrate. Finally, we will produce a kind a sandwich made of thin films with a monosilicon slice at the center. You see, this is a hybrid scheme combining the advantages of thin-film technology and traditional crystalline-silicon modules, resulting in higher power production in diffuse light. The process is accelerated due to the fact that amorphous layers are ten times thinner compared to that used in traditional crystalline-silicon modules.
- Is this a joint project with Rosnano?
- Yes, of course. But these are 'routine' investments; we don’t expect them to knock anyone’s socks off.
- Are you going to replace all existing equipment or continue to use old production lines?
- We will retain absolutely everything we have at the moment, except for a couple of auxiliary operations, because it's all about building up existing processes. We are not going to change our production process -- our idea is to upgrade it. The plan is to start the production of new panels in 2017.
- Who is your customer?
- The product is intended not only for Russian customers, but also for export markets.
- Do you plan to change the strategy of development in the field of solar power?
- When entering the nanotechnology market, you have to remember that nanotechnologies go 'out of date' quickly, as do gadgets, a bit slower maybe. And when we introduce something, we have to understand what will be next. So, the work is ongoing. Our R&D center in St. Petersburg has developed a new generation of modules with an efficiency of above 20%. A strategic challenge for us is to become a player in the new technology production market.
- What were the reasons for management reshuffling in Hevel? Why did Igor Akhmerov leave the Company?
- It is in the nature of any company to develop in this or that way. Igor did a good job. However, pre-opening and opening stages differ from the operational stage. Generally, people who create a system and people who run it are not one and the same. Spacecraft inventors are not necessarily involved in dispatching space missions. Igor Akhmerov's employment contract came to an end.
Now, the management will have another kind of assignment. Igor Shakhray has been appointed General Director of Hevel.
- By your estimates, what is the general mood among players in the Russian power sector?
- As I said, CSA projects which have been implemented carry the burden of foreign currency-denominated loans, and have a fixed rouble tariff, which no one is going to raise in the present circumstances. Therefore, the effectiveness of these contracts for owners and companies turned out to be much lower than it was realized. This is the reality for players in the power market. Hopefully, they’ll revise the tariffs some day.
- And industrial consumers could choose to be self-sufficient, couldn't they?
- They could, of course. As we sit here talking about major generators, about 3 GW of embedded generation, I mean diesel and gas-fueled reciprocating power plants, have been launched so far in the country. This is a serious signal to the major generators.