Two windmills operate in the Russian countryside.

Russia Takes Tentative Renewables Step

Breakbulk Magazine Issue 1-2017 CoverBy Mark Willis

Better known for its substantial hydrocarbon reserves, and heavy carbon emitting oil and gas production, recent signals tentatively suggest that Russia is inching towards diversifying its energy mix by expanding development of alternative renewable energy sources.

While Russia has long been a global leader in hydropower production, the nascent move towards alternative renewable energies should principally be viewed in the context of a concerted government-led drive to create sustainable, domestic wind and solar power industries, with state and semi-state-backed corporations so far accounting for the vast majority of recent investment.

With a broad diversity of environmental conditions and natural resources emanating from the country’s expansive geography, Russia’s capacity to become a global powerhouse in renewable energy production has long been recognized.

“Russia is endowed with a considerable potential for the development of large amounts of diverse renewable energy sources across the whole territory,” said a report produced by the International Energy Agency, or IEA. “The potential is particularly large for wind, biomass, small hydro, geothermal and solar, depending on the regions.” The IEA went on to describe Russia as a potential ‘green giant.’

At present, however, it remains a case of potential unfulfilled, with public investment overwhelmingly focused on developing the rich hydrocarbon reserves that remain a vital source of foreign currency and fiscal revenues, and non-nuclear sustainable energy production highly concentrated in large hydropower projects, which account for more than 90 percent of total renewables output.

“The share of renewable energy in the total installed capacity of the Russian Federation remains very low, not exceeding 0.5 percent if large hydropower plants, responsible for 20.3 percent of total installed capacity, are not counted,” said Sergey Dayman, senior manager of Cleantech and Sustainability Services at EY Russia.

Unsurprisingly, Russia’s domestic renewables sector has lagged the progress taking place within the neighboring European Union, where meager hydrocarbon reserves, environmental concerns, and political momentum towards increasing regional energy security and self-sufficiency have paved the way for development of alternative, lower carbon dioxide emitting energy sources.

 

Boosting Interest and Investment

Encouragingly, recent events suggest that Moscow is gradually moving in the right direction towards boosting private and public sector renewable energy investment through a combination of direct intervention by state-backed corporations and fiscal incentives for private sector groups.

Notwithstanding lingering uncertainty over the government’s commitment to creating a genuine, competitive domestic renewable energy market, the extent of progress required to meet new official output targets, and adhere to international climate change treaty obligations, punctuate its potential to provide opportunities for international project cargo operators.

Highlighting its new intent, the Russian government introduced the first working policy instrument for procurement of renewable projects in 2013, including the introduction of auction tendering for new projects to boost sector competition, and announcement of an ambitious set of future renewable energy output targets.

“The Russian Energy Strategy for the period until 2035 expects that electricity production from renewable energy sources could increase more than twentyfold by 2035, reaching up to 29 billion to 46 billion kWh compared with 2.3 billion kWh in 2015,” Dayman said.

“The amendments of the Russian legislative framework of power industry have significantly strengthened the position of renewable energy projects, providing substantial basis and favorable environment for new generation facilities and localization of equipment production.”

The principle changes implemented by the government have focused on creating conditions for the implementation of a special mechanism for power capacity qualification of renewable energy generating facilities, he added.

In addition to this legislative program, the fresh participation of several large state and semi-state backed corporations in a series of major new wind and solar energy projects over the last 12 months also point towards the government’s new commitment to cast off its environmental laggard status and drive forward the next generation of renewable energy production.

 

Backing Renewables Drive

Of significance was last year’s strategic move into renewable energy by state-owned nuclear energy behemoth Rosatom, which corresponds with the government goals to ramp up wind power energy production.

“This decision represents an important step in the strategy of diversification of low-carbon technology, which Rosatom follows, being confident that the future of energy is a diversified balance of nuclear power and renewable energy, providing affordability, security of supply and minimal environmental impact,” the company told Breakbulk.

Since diversifying its operations into renewables in mid-2016, JSC VetroOGK, the Rosatom subsidiary responsible for developing and managing the firm’s non-nuclear energy assets, has successfully tendered for the construction of 26 new wind generation facilities with total capacity of 610 megawatts.

In conjunction with three additional wind farms planned for Southern Russia, planned investments in domestic wind powered energy infrastructure now total more than €1 billion.

According to Rosatom, the firm’s diversification into the renewable energy sector is representative of Moscow’s commitment to adhere to recent international climate change agreements, and the global drive to lower carbon dioxide emissions.

“This confirms the fact that Russia joined the Paris Agreement (COP21), under which it planned to reduce greenhouse gas emissions by up to 70 percent by 2030. In addition, Russia’s government has taken the initiative to achieve the 2 percent share of alternative energy in the total Russian energy generation by 2024,” said the company.

In addition to already agreed projects, Rosatom will further expand its non-nuclear energy output over the next five years, and will continue to concentrate investment within the domestic wind power production industry.

“The current plans are to invest primarily in wind power generation projects. Rosatom plans to put the first 150 MW of wind power into operation for the domestic market by 2018 with the further introduction of new wind power capacity of 200 MW in 2019 and 260 MW in 2020,” a VetroOGK spokesperson said.

“Wind farms at the initial stage will appear in the south of the country, where necessary wind measurements have already been made, in the Republic of Adygea and Krasnodar region. The very first wind farm will be launched in 2018 in Adygea,” she added.

A forklift lowers the base of a wind turbine onto a trailer, en route from Germany to Russia.
Mortrans handles a wind turbine shipment from Germany to Russia. Planned investments in domestic wind powered energy infrastructure total more than €1 billion. / Credit: Mortrans

Solar Gains

In addition to wind-generated energy, encouraging developments have also taken place within Russia’s solar power sector over the last several years, with the participation of state-backed corporations highlighting government efforts to reduce its excessive reliance on heavy CO2 emitting hydrocarbon natural resources.

Established through a partnership formed in 2009 between private sector conglomerate Renova and state-backed venture capital fund, Rusnano, Hevel LLC has substantially increased its solar energy project investments over the last two years, and in 2015 established Russia’s first full-cycle solar production project.

“The Hevel Group brings together three key competencies in solar energy. We have our own solar module production facility in Chuvashia, an in-house engineering division – which both builds large grid-connected stations and designs standalone renewable energy systems – as well as an R&D center that develops advanced solar power technologies”, said Igor Shakhray, CEO of Hevel.

“We currently have a portfolio of projects to build large grid-connected solar power stations under capacity supply contracts totaling 364 MW, of which 100 MW has already been built,” Shakhray added.

With a sanguine outlook towards the renewable sector’s future development prospects, Hevel’s plans include investing 45 billion rubles (US$758 million) on building solar generation plants during 2015-20, 10 billion rubles of which has already been invested.

“Plans to build renewable generation facilities in Russia are still quite modest compared to the global pace of development. But even though Russia joined the global shift towards renewable energy later, we are optimistic on the prospects for renewable energy in Russia,” Shakhray said.

According to Shakhray, the greatest prospects for renewable energy production is in Russian regions lacking central power supply or grid infrastructure, and areas with an energy deficit, including southern Bashkiria, where industrial production is expanding rapidly and requires additional generation capacity.

Highly isolated regions, such as southern Russia and parts of Siberia, also represent particularly solid prospects for renewable energy development, he added.

 

Constrained by Policy

Notwithstanding rising confidence in future renewable energy prospects, and new government legislation aimed at improving operating conditions, the sector has not experienced a meaningful increase in overall investment or output levels over the last few years, while recent renewable energy license auctions have also attracted few bidders.

The IEA’s renewable energy team attributed this to the weak underlying performance of the Russian economy, currency instability, and correspondingly uncertain investment conditions since 2014.

Additional factors discouraging overseas investors and identified by the IEA are a reduction in government subsidy payments that have effectively lowered guaranteed project rates of return, as well as high levels of local content requirement, which demand that operators purchase Russian-made equipment, even when components may not be readily available.

The legislation has placed constraints on developing onshore wind and small-scale hydropower plants, but less so for solar power due to the opening of more manufacturing plants in recent years.

“Underdeveloped local equipment production for certain technologies combined with high local content requirements and currency exchange risk can be important factors in keeping foreign investors out of Russia’s renewable energy market,” said the IEA.

The analysts conclude that, should recent weak growth rates persist, the Russian government is unlikely to meet its future renewable energy targets.

However, “given the high potentials, renewables growth could speed up quickly if suitable policy and economic conditions were created,” it said.

While uncertainty remains over the short-term growth trajectory and the efficacy of current government policy, development of Russia’s renewable energy sector still has undoubted potential to provide opportunities for international investors, and the project cargo industry.

 

Mark Willis is a Dublin, Ireland-based freelance journalist specializing in politics and economics.

 

Lead photo: In this 2011 file photo, a wind farm operates in the village of Kulikovo, in Russia’s Kaliningrad Region.  /  Credit: Yelena Nagornykh / ITAR-TASS

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