OREANDA-NEWS. April 26, 2010. The head of Market Council Dmitry Ponomarev announced that price caps will likely be introduced in 2011 to determine power capacity tariffs for the existing generation capacity due to low competition. The level of price caps was approved earlier at RUB112.5/kW/month (Europe-Urals price zone) and RUB120/kW/month (Siberian price zone), reported the press-centre of OTKRITIE FC.

View: The price caps will not affect the newly commissioned generation capacity that is to be paid for under Capacity Delivery Agreements. The existing capacity is paid under 2010 regulated capacity tariffs:

RUB103/kW/month for OGKs
RUB160/kW/month for TGKs in the Europe-Urals price zone
RUB158/kW/month for TGKs in the Siberian price zone

We regard this news as marginally negative, as it will have only a marginal effect on OGKs, and the maximum negative impact on TGKs we estimate at 5% of revenues (as capacity revenues represent only a quarter of the total), which the companies should be able to compensate on the liberalized wholesale market.

Valuation: Russian thermal generation companies currently trade at an average EV/installed capacity multiple of USD305/kW, which is less than what they used to trade in 2008 before the crisis (above USD500/kW) and the EM peer average (above USD1,000/kW).

Action: We view this news as fundamentally neutral for gencos, and see any short-term weakness in the stocks as a buying opportunity. Our top picks in thermal generation names are Kuzbassenergo, TGK-13, OGK-1, TGK-1 and OGK-4.