The past few years have seen rapid development of the Krasnodar Kray infrastructure and health resort business on the Black Sea and Sea of Azov coasts, construction of oil, gas and chemical facilities, transport networks, upgrade of seaports have, etc. The economic growth has been accompanied with a surge in electricity use.

In 2006, electric power consumption in the Krasnodar Kray grew by 6.3% compared to the year before. The maximum load in the transmission lines and transformer substations is observed in the Sochi and Novorossiysk energy areas, on the Taman Peninsula, in the cities of Krasnodar and Maykop.

The Agreement seeks to ensure reliable supply of electricity to customers, increase the network throughput capacity, create the conditions for new user connections to the power grids and increase the capacity available to the users already connected, and prevent power shortages in the most important areas of the region.

The Agreement envisages an all-round development of the region's generation capacity, grid facilities, and dispatch infrastructure using advanced technologies. It is planned to bring on line 1,100 MW of generation capacity, 7,200 MVA of transformer substations (29 substations and 59 transformers), and build 1,480 km of bulk transmission lines. RAO UES companies also plan further expansion of the distribution grids in the area. They will construct and put into operation low voltage transformer substations with the total capacity of 1,842 MVA and 87.9 km of distribution lines.

The overall cost of the projects to be implemented under the Agreement is estimated at over RUB83.6 billion, of which RUB33.7 billion will be used to expand generation capacity and RUB49.9 billion will be invested in power grid facilities.

A major focus of the Agreement is to implement the actions provided by the Energy and Power Generation section of the Federal Programme "Development of Sochi as A Mountain Climate Resort until 2014".

Specifically, the RAO UES Investment Programme envisages the construction of power plants on the Black Sea coast that will use advanced technologies and meet the most stringent environmental standards: the Krasnodarskaya CHPP (450 MW), Adlerskaya CHPP (120 MW), power plants near the city of Novorossiysk (180 MW), a chain of four hydropower plants on the Mzymta river (Sochinskie HPPs, over 128 MW), 120 MW combined-cycle power plant in Tuapse, and the second phase of the Sochinskaya TPP project (80 MW).

In order to further develop the power grids in the "Greater Sochi" area, Federal Grid Company plans to construct a unique 220 kV aerial cable line bypassing the mountain ranges, which will link the substations—Tsentralnaya Substation, Goryachi Klyuch Substation, Dzhubga Substation, Psou Substation, and an undersea cable from Dzhubga to Psou, and a new 220 kV Dzhubga substation.

Also, a system of transmission lines will be constructed, which will link the Krasnopolyanskaya HPP with the Psou Substation and the newly-built Poselkovaya Substation. An additional 220 MVA autotransformer will be installed at the Psou Substation. A network of 110 kV substations (Roza Khutor, Laura, and Grushevaya Polyana) will be built in the area of the resort, Krasnaya Polyana ski resort and Imereti Plain.

OAO "Kubanenergo", a subsidiary of RAO "UES of Russia" operating in the Krasnodar Kray, will develop 70 projects in the distribution system. These projects will ensure reliable power supply to the existing customers and connection of new ones. The key projects will the construction of new 110 kV substations (Bytkha, Vishnevaya, and Naberezhnaya) and modernization of existing substations (110 kV Vereshchaginskaya, Sochi, Khosta, Matsesta, Volkonka, and Rodnikovaya).

Most grid facilities will come on line by end-2008. This will make it possible to ensure power supply to the facilities being built as part of the preparations for the Winter Olympic Games 2014 in Sochi, and implementation of the Federal Programme "Development of Sochi as Mountain Climate Resort", which will have been completed by that time, and ensure unhampered connection of other Olympic facilities in the future. All investors have been supplied with specifications setting out the timings for the launch of power grids aligned with the dates for commissioning of Olympic facilities.

The investment projects will be implemented so that to ensure, to the maximum extent possible, the engagement the design, R&M, construction, installation and power engineering firms operating in the Krasnodar Kray which have the requisite resources.

The projects will be financed with own resources and borrowings of RAO UES companies operating in the Krasnodar Kray, connection charges for the grid companies, allocations from the federal budget, off-budget sources, and private investments, including the proceeds from share offerings by the generation companies of RAO "UES of Russia".

The Agreement constitutes an understanding between the Krasnodar Kray Administration and RAO "UES of Russia" in respect of financing of the priority investment projects. According to the document, the region's administration will adjust, on an annual basis, the electricity, heat and transmission tariffs for companies implementing projects in the Kuban energy system, taking into account the need to finance the development and modernization projects.

For that purpose, the Krasnoyarsk Kray Administration will ensure that a economically justified connection fee is set so as to finance the power grid development programmes of OAO "Kubanenergo".

The Krasnodar Kray Administration and RAO "UES of Russia" will prepare an electricity consumption and load forecast by the region's grid nodes covering the period until 2030, including the information on the place and timing of the planned connections of the region's power intensive consumers and generation facilities. The forecast will serve as a basis for the long-term strategy to develop power grids and generation capacity in the Krasnodar Kray.

The parties will also explore the possibility of small-scale CHPP development at the sites of boiler plants located on the Black Sea coast and will produce an action plan to build small-capacity generation facilities.