Russia

Information current as of October 2018

Introduction

Russia’s energy mix is dominated by natural gas,  which accounts for 52% of top primary energy supply and 42% of electricity generation inputs.

The Russian Federation has set out to increase and diversify its use of renewable energy sources (hereafter referred to as “RES”), particularly for power generation. Under current plans and policies, generation from RES should reach nearly 5% of total final energy consumption by 2030. Accelerated deployment, however, could  boost Russia’s renewable energy share to more than 11% in the same timeframe, according to the International Renewable Energy Agency (IRENA). Achieving this potential would require cumulative investments of about USD 300bn in RES up to 2030.

Generally, the environment is more favourable for wind, hydro and solar power generation. Hydropower, representing about a fifth of the Russian power generation capacity, is currently one of the most prominent renewable sources, along with bioenergy used for heating in buildings and industry.

1. Brief overview of the renewables sector

Key statistics

Since the adoption in 2009 of the Russian Energy Strategy to 2030, the Russian legal and regulatory framework has improved but still remains somewhat inconsistent, with the RES generation target being revised several times.

A governmental decree in 2009 set a target of 4.5% by 2020, excluding large hydropower plants of more than 25MW. A governmental resolution in July 2015 lowered the target to a minimum of 2.5 percent by 2020 and set a new target of 4.5 percent by 2024.

The above target corresponds to approximately 5.5GW of newly installed RES capacity (excluding large hydropower plants) by 2024, and is to be achieved using three renewables technologies: solar, small hydro, and wind, with the latter covering the major share of approximately 3.4GW.

In 2016, the total installed RES capacity was approximately 52.9GW, according to IRENA. The main part of it came from large hydropower plants, which represented 49.7GW, followed by bioenergy. As of 2017, according to the Russian Ministry of Energy, hydro, solar, and wind power account for more than 20% of the country's total installed power capacity of about 236.34GW.

Subsidy schemes and tariffs

The Russian legal and regulatory framework sets the rules on wholesale and retail energy trading, and offers certain incentives.

A so-called "premium scheme" applied to the wholesale prices for RES generated electricity, was introduced in 2007 by an amendment to the 2003 Federal Electricity Law. However, largely due to the consumer price concerns and legal difficulties with developing a clear implementation mechanism, this price scheme, which would have been equivalent to a feed-in tariff, has never been put in practice.

In 2011, another support mechanism was introduced by the Federal Electricity Law: the  promotion  of RES through the capacity market. This scheme aims to ensure the financial viability of investments into renewables by concluding "Capacity Supply Agreements" with RES project developers.

The legal framework for this scheme was further developed in 2013  under governmental decree No. 449 (Decree 449). Decree 449 establishes the regulatory mechanisms for selecting new RES projects and for their supply agreements. Under a capacity supply agreement, the grid company (Distribution System Operator) undertakes to purchase electricity from RES-generation facilities in the  relevant  region in order to compensate for transmission losses. The Russian regulatory body, the Market Council, introduced regional incentive schemes for qualifying RES projects. These projects enjoy long-term tariffs, which aim to guarantee returns on investment over 15 years. The capacity to be produced by such facilities is selected by way of annual tenders for renewables at a price that is usually several times higher than the price for existing conventional capacity.

More specifically, the bidders must provide a technical description of the project, including the percentage of localisation (local content) and project financing / guarantee structures. On that basis, the trading system administrator will select the winning bids, and a relevant RES capacity supply contract will be signed.

Various other financial, legal and tax incentives are available at the local, regional and federal levels, depending on the specifics of a particular RES investment project (e.g. region of investment and degree of localisation, type of CAPEX, legal and  project financing structure such as “special investment contract” (SPIC)).

However, although this is a significant step towards the creation of a regulatory framework designed to  promote clean energy production in Russia, there are still restrictions. Firstly, this scheme is only applicable to RES generation facilities eligible for the wholesale market (5MW capacity or more). Secondly, it does not allow the promotion of renewable energy technologies in the regions of Russia that have fully regulated tariff systems and the more isolated regions, where the deployment of renewables is economically feasible and supported by the availability of renewable resources. Thirdly, and above all, only projects in which a certain percentage of Russian technology and locally-produced components have been used (the so-called “local content requirement”) may qualify for the purposes of favourable pricing regime. For example, for wind projects the required degree of localisation is equal to 55% for 2018 and 65% for 2019 to 2024, and for solar projects it is 70%. Governmental decree No. 426 adopted in 2008 and the Order of Russia's Ministry of Trade No. 1556 adopted in 2014 provide the local content requirements for each type of RES, and also provide the formula to calculate a relevant degree of localisation. This is a key condition to ensure project bankability and thus sustainability, as  a  reduction factor is applied to tariffs for projects without the required degree of localisation (35% for solar power and 45% for wind, small hydro and waste treatment power sources).

2. Recent developments in the renewables sector

In 2017, the Russian Market Council, based on amendments to the Rules of the Wholesale Electricity and Capacity Market (Resolution of the Government of the Russian Federation No. 432 of 11 / 04 / 2017), launched a tender for the construction of facilities generating electricity from RES as follows: 1,651MW of wind, 520MW of solar and 49.8MW of small hydro projects. The winners got 15-year capacity supply agreements under Decree 449.

This tender was of historic importance, especially for the Russian wind market, due to the high interest from both foreign and Russian investors and strong competition among such big market players as Enel, Rosatom and Fortum (together with Rusnano).

Significantly, Rosatom and Rusnano, the leading Russian state-owned companies, have not historically been positioned on the RES market (the companies are involved in the development and commercialisation of nuclear and nano technologies, respectively). This demonstrates the political will and awareness of Russian state authorities in relation to the strategic importance of and prospects for RES in Russia. Interestingly, these projects involve such leading foreign wind turbine suppliers as Danish Vestas, Dutch Lagerway and German-Spanish Siemens Gamesa. The suppliers have positioned themselves as key technology partners (supplying or locally producing wind turbine generators in Russia) of Fortum-Rusnano, Rosatom and Enel, respectively.

In total, 43 wind park projects with commercial operation dates between 2018 and 2022 were selected and split as follows: (i) the Fortum-Rusnano JV with 1,000MW of projects, (ii) Enel with 291MW, and (iii) VetroOGK, part of Rosatom, with 360MW.

3. Forthcoming developments / opportunities in the renewables sector

Russia has the potential to increase the use of all types of renewable energy technologies. Historically (since the Soviet period), it has a well-developed hydropower segment. Its bioenergy potential is also significant, as this technology is used in the agriculture, forestry, infrastructure and trade sectors. But today, Russian renewable energy policy is focusing on accelerating the deployment of wind and solar photovoltaic.

In 2018, Russia's Ministry of Energy plans to hold auctions for almost 1GW of renewable energy capacity: 57MW  of solar and 899MW of wind power capacity is likely to be put up for tender.

Moreover, a new system is expected to be in place after 2024 to encourage the development of wind capacity.

Apart from the wind and solar focus, in 2017 Russia introduced a set of legislative amendments aiming to extend the existing renewable energy scheme to energy-from-waste facilities. Currently only the Republic of Tatarstan, Moscow and the Moscow Region are included in the list of Russian regions where such facilities are to be built. First tenders were carried out in summer 2017, and we expect accelerated development in this sector in the coming years.

More generally, there are a number of drivers in Russia that explain the increasing focus on renewables and decentralised energy. New energy solutions are seen as a way to modernise the power system, but they are also a part of a broader socio-economic development model to achieve higher living standards. In addition,  a decentralised electricity generation system is of interest to Russia’s remote and distant regions, as it is economically impractical to extend high-voltage electricity lines to these regions.

Furthermore, decentralised electricity generation  is also interesting and attractive for industrial complexes. It offers opportunities for them and allows them to become more independent from the centralised power system. The current situation of relatively high electricity prices is another reason to explore new energy solutions.

Finally, in response to the EU and US sanctions, Russia’s local content requirements have become one of its main economic policy drivers supporting inbound investments and technology transfers to develop local innovative technologies, including in the RES sector.

Tissot Dominique
Dominique Tissot
Partner
Moscow