Carbon Finance and Corporate Strategy

Carbon Finance

and Corporate Strategy

Vladimir Litvak, Head, New Power Projects, SUEK

MoscowApril 28, 2008

2

TGK-13

TGK-12

Far East Energy

Company

SUEK profile

OGK-2

OGK-2

OGK-2

OGK-2

OGK-2OGK-6

OGK-6

OGK-6

OGK-6

OGK-6

SUEK's Coal AssetsRegion, where SUEK possesses stakes in energy assets

Coal Assets (million tons as of 2007)

Reserves 5,448Production 90.9Exports 27

Energy Assets TGK-12 (48.45%) TGK-13 (40.89%)Far East Energy Comp. (31.8%)

OGK-2 (44.39%) OGK-6 (52.52%) Total

Generation, GW 4.4 2.5 5.6 8.7 9.1 30.3

3

Power Generation in Russia – Reform Status

Revenue$382m

Market share12%

32.0

1.8

2006 2007 2008

Final decisions on the reform are taken – reform is irreversible

Market liberalization has started

IPO of several OGKs and TGKs

Key strategic players identified

Entrance of international players (E.On, Enel)

Post reform

Completion of the reform, RAO UES ceases to exist in July 2008

IPO of further generation companies

Consolidation among key participants of the market

Further international players (RWE, Fortum)

Investment in new and revamping of existing generation capacity

Further liberalization of the capacity market

Principal decisions on the reform are taken

Formation of 6 Wholesale Generation Companies (OGK) and 14 Territorial Generation Companies (TGK)

4

Power Generation in Russia –

Opportunities and Challenges

Substantial value creation in:

Participation in rapid growth of Russian economy

Modernization of plants and equipment

Introduction of management best practices

Unprecedented transformation:

Expected level of commitment by investors versus market uncertainty

Lack of experience in construction of plants in Russia

Scale and coordination with primary fuel suppliers

ChallengesOpportunities

5

Vertical Integration:

SUEK Strategy in Energy Sector

Adequate investments

Creation of engineering capability and standardization

Competitiveness

Secure sourcing of fuel

Integrated investment planning

Integrated logistics and storage

SUEK’s key strategic visions are size and integration

Critical Mass for:

6

Gazprom – SUEK Venture Strategic step with substantial win-win

Vehicle to achieve diversification of power generation in the Russian Federation, with particular focus on coal as fuel

Plans to obtain public listing after completion of the deal Large scale company able to carry out substantial investments:

reconstruction and building new coal fired electricity capacities based on innovative technologies

developing new technologies of extraction and combustion of coal and coal-bed methane

7

Elements of Power and Heat Investment Program

Power and Heat

Construction of new power generation capacity, primarily coal-fired units (both condensing and CHP)

Rehabilitation/upgrade/repowering/modernization of existing units

Environmental Improvements – SOx, NOx, particulates

Coal Mining

Safety and productivity enhancements

Comprehensive utilization of resources (economically and financially sound)

Mine degasification, methane removal and recovery

Decrease in methane venting (environmental charges)

8

Contribution to climate change mitigation: strategy implications and challenges

Power and Heat

Higher efficiency of new units: existing plans are to build in 2008-2012 fleet of coal-fired units with average efficiency of 36-38%

More aggressive rehabilitation/upgrade program for existing units

New generation technologies

CC&S

Coal methane-based capacity

Coal Mining

Comprehensive utilization of coal-mine methane, including gob gas and ventilation air

9

Strategy review, implementation and carbon finance instruments

SUEK is bringing carbon dimension into its corporate strategy under the current round of strategy review

Emphasis is on use of available and future carbon finance instruments

Choice of instruments: investment cycle

First coal-mine methane utilization project: JI

PDD prepared, determination is underway, submission to Russian JI FP is being prepared

Power and heat generation: upgrades/modernization – JI?

New units – GIS?

New instruments – facilities, funds to promote post-2012 reductions, implement clean technologies

10

Summary

SUEK is committed to building more efficient coal power plants with efficiency levels as high as is financially and economically justified (given the increased capex, market rules uncertainties and other factors). The new plants will also have lower SOx and NOx emissions

The The company intends to contribute to national and international efforts to prevent and mitigate impacts of global climate change and is developing its carbon strategy

company is participating in Kyoto Protocol: it is developing the Coal Mine Methane (CMM) utilization project (currently in determination) that will both reduce methane emissions and avoid emissions from additional coal-based generation. It also assesses potential for JI-projects in power and heat generation

SUEK is participating in consultations related to post-2012 carbon markets, viewing new financial mechanisms for reduction of GHG emissions and promotion of clean coal generation technologies as potentially effective instruments in “de-carbonizing” coal-based power generation

SUEK cooperates with IEA, the World Bank, UNECE and other international institutions on the above

SUEK actively discusses with international coal and power companies cooperation in clean coal technologies such as CCS, efficient generation etc.

SUEK is working with the Russian Government to help to develop legislation and other incentives to improve efficiency of coal power generation and make it more environmentally benign