D01). The program was approved by the Board of Directors of PJSC "RusHydro" (Minutes of 23/11/2016 number
244).
PJSC "RAO ES of the East", belonging to the group 2 of the list of state-owned companies that implement
innovative development program (approved the request of the Russian Federation from 15/9/2015 number AD-P36-
6296), and developed a program of innovation development of the Holding Company "RAO ES of the East" for 2016
-2020's. with the prospect of up to 2025 (approved by the Board of Directors of PJSC "RAO ES of the East", the
report of 01.07.2016 №145).
Program of PJSC RusHydro and Holding "RAO ES of the East" in the synchronized execution of the
integrated KPI innovation.
Basic factors influencing the sector:
- GDP growth rates determining demand for electrical power and setting requirements to the quality of
electrical power and schedules of its consumption, the level of investment in new capacities;
- Legislative base determining the payback period for projects in the electrical power sector, sources and
structure of the investment portfolio of energy companies, the level of competition, etc.;
- Level of state stimulation concerning development of specific types of electrical power generation;
- Condition of fixed production assets used by enterprises in the sector;
- The social and economic situation in the country;
- Accessibility of capital markets, including credit resources;
- Level of payment discipline of electrical power consumers
Assessment of results of the Issuer's activities:
General assessment of the Issuer's results in such sector is positive.
Results of the Issuer's activities correspond to the trends of the sector's development.
The main reasons for the obtained results are effective performance of the Issuer on the wholesale electricity
and capacity market, efficient management of expenses and appropriate job management.
PJSC RusHydro was the six among all generating companies participating in the wholesale market as regards
Efficiency on the Market in the Final Annual Rating of Association of Non-Profit Partnership Market Council for
2015 (Company had same rating in 2014). As regards Economic Efficiency the Company was also the six.
4.7. Analysis of Factors and Conditions Influencing the Issuer's Activities
The main factors influencing the state of the industry:
-The temps GDP growth, which determine demand for electricity and requirements to the charts of its consumption,
the level of investment in creating new facilities;
- The legal framework defining the return on projects in energy, sources and structure of the investment portfolio of
energy companies, competition level, etc;
- The level of state encouragement of individual types of generation;
- Condition of basic production assets of the industry enterprises;
- The socio-economic situation in the country;
- Availability of capital markets, including credit resources;
- The level of payment discipline of the consumers of electricity.
The factors and conditions affecting the Issuer's business and results of operations are:
1. Reliability and safety of equipment and HS (hydraulic structures)
Physical depreciation and technological obsolescence of fixed assets, severization of requirements to reliability and
safety of operation of the UES of Russia, demand growth in the adjustment capacity of the daily schedule of
consumption in the European part of the UES of Russia, the growth of the threat of manmade accidents with serious
consequences as a result of the destruction of the HS and the generating equipment, improving valuation of seismicity
in the Issuer's HPPs locations require special attention to the issues of safety and security of assets and funds.
2. Seasonality
The main economic activity of the issuer is not seasonal.
The volume of electricity production of the Issuer substantially depends on the available inflow in river basins, on
which its generating facilities are located, and has a non-uniform distribution of the year depending on the season.
Also the volume of production is affected by forecasting capabilities, as well as decisions of authorities governing
water-economic relations in the Russian Federation.
3. Mechanisms of tariff setting.
Part of the Issuer's facilities is located in the Far East, where in the near future liberalization of electricity markets
and power is not expected. On the territory of the Far East state regulation of prices (tariffs) for electricity and power
is preserved. All volumes of electricity and capacity in this area are sold at regulated prices (tariffs) through a single
purchaser in the IPS East and through guaranteeing suppliers in the territories of isolated areas. The setting of the
tariff for generation is possible only by cost-plus method. According to this method, the inclusion of investment in the
tariff is practically impossible. Given the state policy aimed at accelerated socio-economic development of the Far
East, the tariff setting mechanisms for the region may not provide profit-making operation of generating facilities of
the Issuer in the region. Also tariff regime operating in the region does not create economic incentives to improve
efficiency and the construction of new generating facilities. At the same time, the liberalization of the wholesale
market in other regions may not guarantee the amount of the Issuer's profit, sufficient to cross-subsidization of the Far
Eastern region.
4. The pace of development of the hydraulic potential of Russia
Russia untapped hydro potential is concentrated in areas where there are currently no large consumers and the
necessary infrastructure, tariff setting model does not provide the necessary level of investment yield. At the same
time, the development of these areas is one of the key directions of Russian regional politics.
5. State support of the Issuer
The specifics of the Issuer's activities is determined and will be determined later by the availability of two major
vectors: the need to address state tasks and at the same time the requirement for growth of the Issuer's business.
6. Formation of the new markets model
Emerging markets model will determine the efficiency and reliability of operation of power plants using renewable
energy sources, the pace of development of their use, the degree of compensation of unique HPP contribution to
system reliability in the long term. Currently regulations that determine market rules (capacity market, system
services market, retail markets) are being updated.
7. Participation in the formation of the securities market
The inclusion of securities of the Issuer in the listing of the leading stock exchanges imposes high demands in terms
of information disclosure in accordance with the requirements of stock exchanges and market regulators, both
Russian and international.
8. Development of electricity production based on renewable energy sources (.). Attention to problem of electricity
generation based on renewable energy sources (wind, ground heat, small hydro, and others) in the world, the need to
diversify energy sources and reduce the burden on the environment, along with the presence of significant untapped
potential of renewable energy sources under conditions of the adopted legislation to support the generation in price
zones of the wholesale market in Russian Federation are opening up new possibilities for the development of
electricity generation through the use of renewable energy sources both in the wholesale and retail markets. The
Issuer shall prepare projects for participation in the competitive selection in the wholesale market.
9. Opportunities of related industries
Research and Development, Design and Research, Engineering and Construction complexes have in recent decades
had significant losses due to the low demand for their products and services. Limitations caused by the shortage of
goods and services in these markets may have a significant impact on the rate of development of the Issuer.
10. Staffing: one of the most acute problems on the way of large-scale hydropower development is the lack of
technical staff.
11. Global climate change
Climate change has increasingly direct impact on the Issuer's business, which is reflected in the increasing complexity
of predicting water regimes due to the growth of hydrograph inflow variations and weather conditions.
Forecast of duration of these factors and conditions
The action of these factors and conditions will have a significant impact on the Issuer's activities over the next few
years.
Actions taken by the Issuer and actions which the Issuer plans to undertake in the future to effectively use
these factors and conditions:
- Overcoming the tendency of the moral and physical wear and tear of equipment, improving reliability and safety of
HS through the implementation of the Programme of comprehensive modernization of generating facilities.
- Balanced development complying with the interests of all groups of shareholders, new schemes of financing and
distribution of property, including the determination of forms and procedures for state participation in ongoing
projects;
- Providing the state and regions with opportunities and projects of industrial, infrastructure and social development,
at which hydraulic power plants would be needed and their order would be constantly recurring;
- The promotion of forming market model that ensures the efficiency of construction of renewable energy sources and
adequate compensation of the Issuer's contribution to system reliability;
- Development of competencies on work in conditions of publicity, meeting the requirements of the investment
community and minority shareholders, as well as the use of the best practices of corporate management;
- Formation of an effective system of interaction with key stakeholders of resource markets, reducing risks by
business diversification, organization of support of sectoral science and innovative technology;
- Creation of an effective system of training of engineering personnel, including a system of cooperation with relevant
educational establishments, and mechanisms stimulating the influx of personnel in the sector and the development of
professional knowledge and skills;
- Creating a system for forecasting and water regime monitoring.
The methods used by the Issuer, and the ways in which the Issuer plans to use in the future to reduce negative effect
of factors and conditions affecting the Issuer's activities, including:
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