The Russian electricity system - still essentially the result of 70 years of Soviet central-planning - is in dire need of new investment, for both a renewal of assets and an overhaul of regulations and operations, if it is to realistically meet the demands of the next decade, a study by KPMG's Global Advisory practice, reveals today. The study estimates that the electricity sector requires - and could obtain - USD 500-550 bn in investment by 2020 to meet the expected challenges, although achieving this target efficiently, i.e. at low cost, depends to a large extent on creating a fairer and more transparent business environment.

The study, by KPMG`s power industry research team, is one of a series of four entitled "Think BRIC! Key considerations for investors targeting the power sectors of the world's largest emerging economies."

The research team questioned in detail energy sector executives familiar with the everyday reality in Russia to obtain an in-depth assessment of the sector and its needs.

"There is no doubt that Russia needs massive investment in its electricity sector. The country requires new generating and network capacity, refurbishment of existing plant, energy saving technology plus consultation, training and education to bring standards up to 21st century levels," says Peter Kiss, KPMG`s Global Head of Power &Utilities, partner in the Hungarian firm and leader of KPMG`s Global Power & Utilities Knowledge and Resource Center, which was responsible for the study.

All this means vast opportunities "are out there for providers with the right products and skills," Kiss adds.

Russia boasts the largest electricity market in Europe, with consumption at 850 TWh in 2008, or roughly 5 percent of the global electricity market. This is expected to grow by some 2.1 percent annually to break the 1,000 TWh level in 2020, if conditions for the necessary investment are put in place.

But it is a big if, says Andrew Korn, Head of Energy, KPMG in Russia and the CIS, and it begins with what he terms the big technical if - since even the engineering challenges are vast and complex. There are official plans for even bigger investment programmes, but our analysis reveals that realistically Russia needs roughly 39 GW of new generating capacity, plus significant modernization of the 220 GW currently installed, Korn says.

These power plants comprise mainly nuclear, gas, coal and hydro units in conditions that range from relatively modern and efficient to ageing, decrepit and polluting units that would not be granted operating licenses were they in the European Union, he notes. In addition, he points out that much of the transmission and distribution network, comprising some 3.2 million kilometers of cables stretching across 11 time zones, needs strengthening and renewing.

As the study emphasizes, with every segment of the system crying out for attention, the opportunities to service the sector - be it with heavy-current hardware, micro-electronic metering equipment or the education of a new generation of operating staff - the field is vast and varied.

Generation certainly needs a big spend.

"In terms of production, there is little doubt that there will be significant expansion in nuclear - there are proposals for 30 new units - and coal-fired plant, with a reduced emphasis on hydro and gas-fired generation; Russia wants to export its gas," says Kiss.

And even though renewable sources are unlikely to attract much support given the urgent needs of the system even the modest expectations of a 2 percent market share by 2020 equates to 22 TWh of electricity.

But despite all the needs, potential investors will need to cope with what Andrew Korn terms the "special Russian if," meaning the regulatory and business environment issues that deter otherwise good-looking investment deals that would benefit all parties.

As the report notes: "Although the former state-owned, vertically-integrated electricity company has been unbundled, the transmission and distribution networks, plus nuclear and hydro generation assets, remain in state or public ownership."

This means powerful vested interest groups have little desire to do commercial battle with private players. As one market participant stresses in the study; "The rules of the capacity market should be urgently confirmed, because the whole process is blocked by this problem. Until this block is removed, nobody is going to build anything normally."

Furthermore, there is also little public awareness that private capital and know-how would reduce inefficiencies and improve services.

Yet the market remains attractive, despite these serious concerns, and as demand picks up again after weakening in the wake of the global downturn, so pressures to deliver will increase.

"Russia is not an easy market, but political and business leaders are aware of the needs and want the country to come to European levels. With the right approach, careful assessment and using experienced advisers, investment projects will prove successful," says Kiss.

The full version of the report you can find here.