OREANDA-NEWS. Russian utilities' 2015 results are likely to be weaker than previously expected because of a sharp drop in payments to keep existing generating capacity online, Fitch Ratings says. This will make utilities' credit metrics increasingly reliant on solid cash flows from the newly commissioned units under separate capacity supply agreements (CSAs).

Capacity payments are made to ensure plants remain operational and ready to produce electricity in periods of high demand. But the commissioning of new power plants and the slowdown of Russia's economy due to economic sanctions has created excess capacity. This resulted in a 24% drop in capacity prices for the Urals region in the recently completed 2015 capacity auction. Capacity prices in the European region will also fall 12%, while the payments in the Siberian region will jump 84%.

As well as falling prices in the most important regions, over 15GW of less efficient generation capacity, mostly in the European part of Russia, was not selected during the auction due to the surplus of capacity. These plants may therefore not receive any capacity payments in 2015, although generating companies will probably apply for 'must-run' status for affected power stations, which can allow payments to continue.

The auction results are likely to reduce capacity revenue for the existing power units of several Russian generators operating in the European and Urals regions, including Enel OGK-5, E.On Russia, Fortum (TGK-10), and to lesser degree TGK-1, Mosenergo and Inter RAO.

However, this pressure is likely to be mitigated by solid cash flow from capacity payments from newly commissioned units under the CSA, which are expected to increase because of rising interest rates. The impact will be partially offset by stronger Siberian results for companies with a substantial exposure to the region, which include RusHydro, Inter RAO and to a lesser extent E.On Russia. The impact will be greatest on utilities with a high proportion of thermal generation, as hydro and nuclear power plants have priority.

Fitch expect the margin deterioration to be manageable at current ratings across the sector; including thermal generation. In the medium term the auction may accelerate the decommissioning of inefficient generation capacity, improving the overall efficiency of Russian generating companies.