OREANDA-NEWS. April 20, 2010. The Russian government signed a decree 13 that sets the rules and parameters of the long-term power capacity market for thermal generation companies, which will be used to calculate the capacity tariffs for newly commissioned generation capacity effective January 2011, reported the press-centre of OTKRITIE FC.

An average construction cost of RUB35K/kW is assumed for natural gas fired plants and RUB51K/kW for coal fired plants.

A 14% IRR is set for generation companies that raised funds through a SPO and a 15% IRR for those that did not.

The breakeven period for the investment project is set at 15 years.

View: The final tariffs for new capacity will be set for each generation company individually under its Capacity Delivery Agreements (CDAs), and will depend on the actual investment projects of the company. We expect the CDAs to be signed in the next three months. In our DCF models for generation companies we assume similar costs for gas-fired plants, lower costs for coal-fired ones, a 15% IRR for all companies and a 2-year breakeven period. This results in an average 2011 new capacity tariff of RUB308K/MW/month. Our preliminary calculation shows that the approved parameters imply an average capacity tariff of above RUB500K/MW/month, and thus we see significant upside to our forecasts.

Action: We view the news as positive for the generation stocks and highlight efficient gencos with a high share of newly commissioned capacity in 2011: OGK-1, TGK-1, Mosenergo and OGK-4.