Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

REPORT

Quick Scan of Wind, Solar Energy and Combined Heat and Power in the

Russian Federation

March 2013

1 Lighthouse B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Contents 1. Executive summary ...... 4 2. Introduction ...... 9 2.1. Initial assignment ...... 9 2.2. Assignment as formulated in conjunction with the client ...... 9 2.3. Methodology ...... 9 3. General overview of the renewables sector ...... 12 3.1. Current state of the overall energy sector ...... 12 3.2. Power generation industry ...... 15 3.3. Status quo of renewables in the Russian energy market ...... 17 3.4. resources potential in Russia ...... 19 3.4.1.Gross potential of renewable energy sources ...... 19 3.4.2.Regional potential of renewable energy sources ...... 20 3.4.3.Business potential ...... 21 3.5. Drivers of renewable energy deployment in Russia ...... 22 3.6. Challenges to deployment of renewable ...... 24 4. Policy and legislative environment ...... 27 4.1. Renewable energy regulation ...... 27 4.1.1. Federal level ...... 27 4.1.2. Recent regulatory developments ...... 28 4.1.3. Regional level ...... 31 4.1.3.1. RUSTEC: IFC’s proposal to green Europe’s electricity supply by developing Russia’s potential for renewable energy ...... 32 4.2. Administrative regulations ...... 33 4.3. Stakeholder projections ...... 35 4.3.1 Russian Energy Forecasting Agency ...... 35 5. Potential barriers and threats for the development of the renewable energy sector ...... 37 5.1. Economic ...... 37 5.2. Financial ...... 38 5.3. Social and cultural ...... 39 5.4. Political and institutional ...... 39 5.5. Legislative ...... 41 5.6. Environmental ...... 41

2 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

5.8. Technical and infrastructure-related ...... 42 6. Wind energy sector ...... 44 6.1. Wind energy resource potential and regional potential across Russia .... 44 6.2. Current state of the sector and future prospects ...... 47 6.3. Bottlenecks along the wind power supply chain ...... 51 6.4 Case study and lessons learned ...... 53 7. Solar energy sector ...... 56 7.1. Solar energy resource potential and regional potential across Russia .. 56 7.2. Current state of the sector and future prospects ...... 60 7.3. Bottlenecks along the solar power supply chain ...... 61 8. CHP...... 63 8.1. Current state of the sector and future prospects ...... 63 8.1.1.Sector structure ...... 63 8.1.2.Challenges ...... 64 8.1.3. Future prospects ...... 65 8.2. Potential of CHP in Russia ...... 67 8.3. Bottlenecks along the CHP sector supply chain ...... 70 9. Opportunities in the Russian renewable energy market ...... 71 9.1.Recommendations……………………………………………………………………………………74 10.Bibliography ...... 75

3 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

1. Executive summary 1. Russia currently uses very little of its huge renewable energy potential: the share of renewables excluding large hydro, i.e. wind, solar, biomass, geothermal, ocean, in the Russian amounts to less than 1% and has been decreasing during the last decade. 2. The most developed segments of the Russian renewable energy sector are small hydro power and bio fuel. Russia traditionally has extensive expertise in the small hydro power sector, which is currently supported by the emergence of local small hydro plants equipment manufacturers. The bio fuel segment is driven by the access to bio fuel resources, expertise in capturing the bio fuels and feasible export potential. 3. The economic potential of renewable energy sources in Russia is estimated at 273.5 million tonnes of equivalent fuel per year and the technical potential at 4593.0 mln tonnes of equivalent fuel per year. 4. Development of renewable energy facilities in remote communities of the North-West, Siberian and Far East regions of Russia has high economic potential. The costs of diesel power generation, which provides energy supply in remote areas, are higher than the costs of using renewable energy resources, which are widely available in such areas, e.g. biomass in the north-western regions and , wind on the North-West and Far East coast of Russia, tidal in the Far East regions. 5. The North-West Federal District (especially and Kaliningrad regions) and the Southern Federal District (especially Krasnodar and Volgograd regions) have the largest resource potential of renewable energy fuels. 6. The main incumbent market players such as Rusnano, RusHydro, Russian Technologies (“Rostechnologii”) and large energy companies are more focused on furthering their vested interests, e.g. lobbying for their own local projects, and less on contributing to the development of the renewables sector as a whole. The future of large power network projects still directly depends on the state support on the federal and regional levels. 7. The main drivers for the development of the renewable energy sector in Russia are: a) the need to secure energy supply to remote areas with autonomous power generating units and regions with a power deficit; b) increasing fuel prices and energy tariffs for all types of consumers and existing limitations on establishing new grid connections; c) the willingness of industrial enterprises to develop autonomous power supply in order to lower energy costs and minimize risks; d) environmental issues; e) requirements to develop the hi-tech sector of the Russian economy and support value-added production. 8. The main challenges the renewable energy sector faces are the artificially low costs of traditional and locally available energy sources which make renewable energy power generation non-viable; the relatively non- transparent and inconsistent legal framework; lack of practical and systematic political support; weak awareness of environmental issues and renewable energy among the general population; lack of financing opportunities; poor state of the grid infrastructure and advanced average age of electricity and heat generating plant.

4 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

9. The key challenge for renewable energy in Russia is the resistance of key decision-makers within the federal and regional governments and the powerful lobby of the oil and gas and electricity producers. This is exacerbated by a general lack of political will to develop the renewables sector at the highest political level. If the decision to actively develop the renewable energy sector is made by the key political figures on the federal and regional levels, the other practical barriers and constraints can be solved in the shortest time period. 10.The legislative environment in the field of renewables is characterized by on-going regulatory uncertainty with regard to financial and non-financial support for non-hydro renewables and the lack of transparency and predictability offered by federal as well as regional policy decisions pertaining to renewables. 11.Among the recent developments, the most promising is the draft set of regulatory measures for the promotion of RES-E with the aim of implementing the incentive mechanisms outlined in the existing legislation and indicating the measures’ respective implementation dates published by the Ministry of Energy in early 2012 and followed by a corresponding government order for the approval of set of measures to stimulate power generation by facilities powered by renewable energy sources. According to the timetable set in the government order, the components of the policy package will be gradually introduced by the end of the second quarter of 2013. 12.The state targets for renewable power generation capacity installation until 2020 have also been revised by the Ministry of Energy. In the meantime the expert committee of the Ministry of Energy concluded that the actual share of renewables in the total energy production and consumption in Russia in 2020 cannot reach its original target of 4.5% non-hydro renewable electricity. In their opinion, renewables will account for no more than 3% by 2020. 13.Over the past decade, several regions, such as Belgorod, Krasnodar, Tomsk and Volgograd regions, have introduced regional legislation for the support of renewables. The main drivers for these initiatives are to reduce some regions’ dependence on fossil fuel imports ( or oil) by switching to indigenous RES, e.g. biomass, small hydro or wind, and to utilize the substantial potential of agricultural (e.g. pig and poultry manure) and forestry wastes (which cause major disposal challenges). 14.Several administrative hurdles exist that create constraints for the development of renewable energy projects: regulations concerning the land lease, construction permits and licenses, grid connection and grid access limitations. 15.In 2012 the International Finance Corporation has presented its RUSTEC concept which aims to green Europe’s electricity supply by developing Russia’s potential for production of cost-effective renewable energy (e.g. wind, small hydro, and biomass). Under the conditions of committed engagement from all major stakeholders and the implementation of a predictable and transparent regulatory environment, the RUSTEC concept can kick-start the Russian renewables industry and create business opportunities for foreign companies. 16.Russia has numerous areas with substantial wind energy potential and annual mean wind speed exceeding 6.0 m/s, e.g. along the north-western

5 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

and far eastern coasts of Russia (Barents, Kara, Bering seas and the Sea of Okhots and the Chukchi and Laptev seas). Slightly lower wind speeds can be found in the South Federal District. According to the Ministry of Economic Development, the economic potential of wind energy amounts to 250 bln kWh per year, which is 25% of Russia’s total annual energy consumption. 17.The most favourable areas for construction of wind power generating facilities are remote communities lacking centralized power supply. The practical potential also lies in the deployment of multifunctional power installations, which combine diesel generators with wind energy installations. 18.The existing wind parks in Russia date back to the beginning of the 21st century. Currently the installations either use only a smart share of the total capacity or have been frozen. The operators of the wind parks claim that the installations have not proven to be financially sustainable. 19. At the time of writing, several projects are at the feasibility assessment or project development stages but their perspectives are still not clear due to the lack of predictability and consistency of the Russian legislative base in the field of renewables, lack of support from the federal government and lack of available financing opportunities. Experts highlight several serious bottlenecks in the development of wind energy projects such as expensive equipment and complicated logistics of the equipment, lack of professional local man power and difficulties to adapt western technologies to the Russian context, e.g. the extreme cold and extensive snow cover in many climatic zones across Russia. . 20.In the solar energy sector Russia has a large potential for solar photovoltaics (PV), which can take advantage of more widely available diffuse radiation. In contrast, because of its climatic conditions, the country shows only a negligible potential for concentrating solar power which depends on direct normal irradiation. 21.Solar power stations can be viably situated in the Southern and Far Eastern regions of Russia. 22.At the moment solar power sector in Russia is immature. Existing projects are limited to small off-grid installations which supply energy to industrial enterprises. Most of the solar installations are also combined facilities, using wind energy or biomass fuels. 23.Russia has substantial potential for low-enthalpy domestic (and commercial) solar water heating, this cost effective use of solar energy is competitive with electric and oil-fired heaters. 24.Although the installed solar PV capacity in Russia is small, there is substantial progress in the local production of feedstock silicon for solar cell production. 25.Growth of the share of cogeneration in the total heat and power generation is one of the main targets of the development of the Russian power industry. The plans of the government envisage the installation of more than 3 GW capacity of distribution cogeneration. 26.The vast majority of Russia’s CHP plants are attributed to the district heating sector. There is little activity in the segment of small CHP installations. But the largest opportunities exist in the small CHP sector, which is a viable solution to power supply challenges in remote communities with no centralized power and heating networks, remote

6 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

areas such as areas of extraction of natural resources, transport routes, border regions and for industrial enterprises which demand an uninterrupted, reliable power supply. 27.The main bottleneck of the development of the cogeneration sector is the political factor, associated with low correlation of the power and heating market and the different ownership of the power and heat generation facilities and networks. This conflict of interests hinders the development of CHP in Russia. 28.The current situation in the Russian renewable energy sector, characterized by the current low status of renewables on the political agenda, lack of a set of supporting measures for the renewables sector and uncertainty of the legislation, does not envisage large scale opportunities for foreign companies and organizations. However, niche opportunities exist in the wind energy and CHP sectors, namely  construction of small and medium scale CHP installations fuelled by biogas and biomass residues;  construction of CHP installations as part of the energy supply optimization programs of industrial enterprises;  modernization of the hardware and software of existing medium scale CHP plants;  ad hoc expertise in operational management of wind energy projects;  consulting services, i.e. feasibility studies of wind energy projects. 29.The anticipated improvement of the legislative and policy framework will kick start the Russian renewables industry and will bring the existing opportunities to a larger scale as well as create new and wider opportunities for Dutch companies, including:  expertise in project development and project management of wind energy and solar energy projects;  installation and operation of medium scale CHP in the private and public sectors;  joint venture production of renewable technologies and equipment based on Russian R&D potential and technical expertise;  grid modernisation and grid modelling;  training and preparation of Russian specialists. The following table summarises the strengths, weaknesses, opportunities and threats (SWOT) for the wind, solar and CHP sectors in Russia which the quick scan identifies:

7 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

STRENGTHS WEAKNESSES 1. Huge renewable energy resources 1. Non transparent pricing potential. mechanism in the power sector: 2. High energy demand. subsidised supplies of conventional 3. Established electricity export routes fuels for power generation. to , , and 2. Lack of financial and non-financial . support measures for the renewable energy sector. 3. Regulatory hurdles (bureaucratic administrative procedures). 4. Lack of public and private investment into the renewables sector. 5. Lack of local manufacturing of renewable technologies. High costs of imported equipment and technologies. 6. Low quality of the general infrastructure. 7. Lack of adequately skilled, technical man-power. OPPORTUNITIES THREATS 1. Liberalisation of the energy sector 1. Lack of high level political support and reforming of the electricity for the deployment of renewable market. energy in Russia. 2. Growth of energy tariffs. 2. Low investment confidence in 3. Improvement of the legislative and renewable energy projects. policy framework. 3. The national transmission grid 4. Introduction of a set of measures to needs significant upgrading and stimulate power generation by expansion. facilities powered by renewable 4. General lack of awareness of the energy sources. society about renewable energy. 5. Integration of the Russian and Western European electricity grids. 6. Improvement of power supply to remote communities. 7. Growing demand for reliable power supply and overcoming of grid network limitations. 8. Establishing of local production of renewable technologies (joint ventures with foreign manufacturers).

8 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

2. Introduction 2.1. Initial assignment The Ministry of Economic Affairs has reached a cooperation agreement with the Ministry of Energy of the Russian Federation in which several areas of energy- efficiency and sustainable energy have been included. Several activities in the areas of bioenergy, energy efficiency in industry and smart grids / smart meters have been initiated based on interest expressed from the Russian side. However, the Russian Ministry of Energy has expressed little interest in cooperating in the area of wind energy, solar energy and combined heat and power (CHP). As these topics are included in the MoU between the Ministry of Economic Affairs of the Netherlands and the Ministry of Energy of the Russian Federation, the Ministry of Economic Affairs would like to execute a quick market scan of the wind energy, solar energy and CHP sectors in order to establish the current market situation and the potential of the Russian wind, solar energy and combined heat and power sectors in order to determine whether further activities in these fields from the Dutch perspective will be interesting are not. The purpose of the present assignment is to obtain an insight in current activities in the field of wind energy, solar energy and CHP in Russia. The results of this study may lead to the definition of follow-up activities within the cooperation framework between the Netherlands and the Russian Federation. 2.2. Assignment as formulated in conjunction with the client According to the request for proposal issued by the Ministry of Economic Affairs of the Netherlands, the quick scan should provide information on the following: 1. National and regional policies in the area of wind, solar energy and combined heat and power (CHP); 2. Current and potential situation and the state of affairs in the wind, solar energy and combined power heat (CHP)sector; 3. Key organizations and market players. Lighthouse formulated the main objectives of the market scan: 1. Identifying the current status and potential of the wind, solar energy and CHP sectors in Russia. 2. Identifying barriers (including legislative, cultural, macroeconomic, institutional, and infrastructural and others) and the trends in the wind-, solar energy and CHP sectors, relevant for the identification of the business potential of the Russian market. 3. Development of recommendations for further activities of the Dutch side on the Russian wind-, solar and CHP energy markets and creation of business opportunities for Dutch companies. 2.3. Methodology Lighthouse developed the following approach to conducting the market scan of the wind, solar energy and CHP in Russia in order to provide all the information requested by the Client: 1. The consultants gathered and analysed all available relevant information from primary and secondary sources through desk-based research:

9 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

a) Quantitative data/statistics on current activities in the wind-, solar energy and CHP areas; b) Reports on existing projects and initiatives in the wind-, solar energy and CHP areas; c) National and regional law and renewable energy policies; d) Government documents and position papers in the renewables sector; e) Forecasts/projections, regional and federal policy targets; f) Proposed support schemes for renewables; g) Comparative assessment of existing expert literature on energy efficiency in industrial sectors, technologies, policy and regulatory environment, barriers. Important information sources included:  IFC Russia renewable energy program;  Russian Energy Agency (REA)  Ministry of Energy  Federal State Statistics Service (Rosstat)  International Energy Agency publications, including the World Energy Outlook and statistics Key publications are referenced in the bibliography. 2. The project team conducted interviews with relevant stakeholders. As it was anticipated that not all information would be publicly accessible through desk-based research, the above research was completed with interviews of the stakeholders. The project team used their extensive network of contacts throughout Russian businesses and organizations to obtain a practical view on the current state and the potential of the wind, solar energy and CHP sectors. The consultants conducted interviews with the following Russian stakeholders: 1) Igor Bashmakov, Director of CENEF 2) Patrick Willems, Head, IFC Russia Renewable Energy Programme (RREP) 3) Vladimir Usievitch, Head of the department of financing of the energy sector, Sberbank 4) Anatoly Kopylov, Vice-President, RAWI (Russian Association of Wind Power Industry) 5) Tamara Merebashvili, Deputy Director, Energy Efficiency and Power centre, INTER RAO 6) Vladimir Golubin, Deputy Director, South Centre of Power Engineering 7) Alexey Kokorin, Coordinator, Climate and Energy, WWF Russia 8) Yuri Sibirsky, Project manager of the Renewables section, Skolkovo Fund 9) Solar industry expert, who preferred to stay anonymous

3. The project team critically assessed and evaluated all the information obtained.

10 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Scope of study An executive summary to the report is provided in Chapter 1. Chapter 2 gives an introduction to the Assignment as formulated by Lighthouse in conjunction with the client and an overview of the methodology underpinning the study. Chapters 3, 4 and 5 of the report focus on the Russian renewable energy sector in general. The wind, solar energy and CHP sectors cannot be assessed separately from the general renewables sector as there is a single policy and legislative environment for all types of renewable fuels in Russia, and the main drivers and barriers for the development of renewable energy projects in Russia are structural and relate to all of the sub-sectors. Chapter 3 gives an overview of the current state of the general energy market and the power generation capacity in Russia. The overview is provided in order to identify the status quo of the renewables on the Russian energy market. Further on, the renewable energy resources potential and the drivers of the renewables deployment are established for all types of renewable energy fuels. In Chapter 3 the main structural challenges, which hinder the development of the sector are identified. A more detailed description of the barriers and threats for the development of the renewable energy sector which result from the sector challenges is given in Chapter 5. Chapter 4 is dedicated to policy and legislative environment of the renewable energy sector. The report describes the current federal and regional level policies and regulations as well as recent regulatory developments and the impact which they will have on the renewables sector. Chapters 6, 7 and 8 give a detailed overview of the current state and potential of the wind energy, solar energy and CHP sector respectively. Specific bottle necks for each sector are also identified per chapter. In Chapter 6 the report provides a description of the lessons learned from the development of the large scale wind park in the Murmansk region, executed by a Dutch company Windlife Energy. This case study helps to identify the key constraints to executing a renewable energy project in remote areas of Russia. In Chapter 9 the opportunities for Dutch manufacturers and service providers on the Russian renewable energy market are established. The opportunities are divided into current opportunities, which can be realized in the existing policy, legislative and financial framework and potential opportunities which will be created once the expected improvements are made to the policy and legislative framework.

11 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

3. General overview of the renewables sector 3.1. Current state of the overall energy sector Russia is a global energy powerhouse, which possesses around a quarter of world gas reserves, 6% of the global oil reserves and a third of the world’s coal reserves. Russia is one of the main oil and gas producers in the world: accounting for almost 12% of annual global oil production and 20% of the global gas production and supplying energy to consumers in Europe and Asia. In terms of consumption, Russia is the third-largest energy consumer in absolute terms and the second-largest consumer of . At the same time Russia also has the most energy intensive economy from the top 10 countries largest energy consumers1. The energy sector plays a pivotal role in the Russian economy. It is one of the main drivers of Russian economic output and budget revenues (accounting for almost half of the Russian GDP), but declining investments into the energy sector, a strengthening of the sector’s structural imbalance and slowing of the growth rates, can lead to a systematic crisis of the energy sector which in turn will effect the whole Russian economy. According to Mr. Bashmakov2, Russia may become one of the first countries with continuously shrinking GDP if the current development scenario of the energy sector remains unchanged. The fact that the energy sector was state-controlled during the Soviet era has left a legacy of inefficiency and distorted prices in the domestic energy market. Currently, subsidies and cross subsidies are still widely used to regulate the prices on the Russian market, for example, domestic prices for natural gas, which represents over half of the total energy demand, are still state-controlled and kept artificially low. Electricity and heat tariffs are also to a large extent regulated by the state. Over the past decades, significant attempts to restructure the Russian energy sector have taken place aimed at privatisation, de-monopolisation and the introduction of cost-based pricing. The energy market reform is still in process at the moment and its pace differs from sector to sector. The oil sector was restructured and privatized in the 1990s. Today, several large vertically integrated companies, numerous small independent producers and many joint ventures operate in a competitive market. Large investments have been made over the last few years in short-term enhancement of oil fields. Coal sector restructuring, with financial and technical assistance from the World Bank, resulted in the closure of many unprofitable mines and significant reductions in subsidies. The sector is being rapidly privatized. The main problem, however, which still needs to be addressed, is the competitiveness of Russian coal with other fuels and with imported coal. The Russian gas sector is dominated by the state monopoly . Domestic prices for natural gas are still state-controlled. There is much debate surrounding the liberalization of the gas sector in Russia and providing transparent access to the pipeline network controlled by Gazprom for independent gas producers and oil companies. The restructuring of the gas

1 OECD, Economic Surveys Russian Federation, December 2011 2 Director of CENEF

12 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation sector should also result in opening up access to the export markets for independent producers. Over the last years, the Russian government has made major steps towards the liberalisation of the reforming its electricity market. The Federal Electricity Law provides the legal basis for the operation of the liberalized electricity sector. One of the central aspects of the Russian electricity reform is the creation of a competitive wholesale electricity and capacity market. The Wholesale Market Rules, adopted by Resolution of the Russian Government No. 1172 dated 27 December 2010, constitute the regulatory basis for the functioning of the Russian wholesale electricity and capacity market. The wholesale electricity market consists of a day-ahead (spot) market and an intraday (balancing) market. In addition to transactions on the day-ahead market, the electricity commodity can be traded on the basis of bilateral contracts. The capacity market remunerates generators for the installed capacity of their electricity generating facilities. The System Operator organizes the capacity market for four years preceding the supply of capacity. To fulfil their capacity supply obligations, generators that sell (supply) capacity on the wholesale market must guarantee the availability (readiness) of their installations to produce electricity. The System Operator selects capacity on a competitive basis. It therefore aims to achieve long-term security and short-term reliability of electricity supply. Capacity demand is created by requiring the buyers of electricity on the wholesale market to purchase an amount of capacity that corresponds to their peak electricity consumption. Parallel to this liberalization process, Russia has pursued corporate restructuring (privatization) of the electricity sector by selling the thermal electricity production capacity of the former quasi-monopolist RAO UES to private Russian and foreign investors. The assets sold off are classified as either wholesale generating companies or territorial generating companies. On 1 January 2011 the wholesale electricity market started functioning on the basis of the long-term model as a result of the gradual transition from regulated to competitive market prices. Participation in the wholesale market is limited to large generating facilities. Generators with an installed capacity equal to or exceeding 25 MW must participate in the wholesale market. Generators with capacity of at least 5 MW (but less than 25 MW) can sell electricity and capacity on the wholesale market or participate in the retail market. Generating facilities with capacity less than 5 MW must participate in the retail market. The retail market is open to competition, with the exception of regulated tariffs for the electricity supplied by the guaranteeing suppliers or “last-resort suppliers”. The guaranteeing suppliers are the companies supplying private customers (not less than 50 million kWh per year), companies supplying electricity to the bodies affiliated with Russian Railways and island-type generating companies (not connected to any grid e.g. an oil pumping station’s diesel power plant, also supplying power to the local community). The guaranteeing suppliers are obliged to sign a supply agreement with any customer within the supplier’s area. The areas and the tariffs for guaranteeing suppliers are regulated by the government.

13 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

The wholesale market is divided into price and non-price zones. Non-price zones are not organized on the basis of the free market model. Moreover, isolated regions in the Far East and North of Russia are not included in the wholesale market3. The main export routes for electricity produced in Russia are the former USSR countries (, , ) and Finland. Table 1. Export of electricity from Russia, 2010-20114

Export of electricity 2011 2010 Change (million kWh)

Finland 9 636 10 535 -8.5%

Lithuania 5 543 5 106 8.6%

Georgia 448 212 111.2%

Azerbaijan 44 18 148.1%

Belarus 3 173 29 10 774,7%

Mongolia 263 214 23.2%

Ukraine 22 32 -30.1%

Kazakhstan 2 208 1 376 60.5%

South Ossetia 132 118 11.7%

China 1 238 983 26.0%

Latvia 0 7 -100%

Total exports 22 709 18 630 21.9%

The main supplier of electricity to Russia (energy deficit regions, situated on the border) is Kazakhstan.

3 IFC, Renewable in Russia: Waking the Green Giant, 2013, pages 13–16 4 Overview of the electricity trading in Russia, Inter RAO http://interrao.ru/activity/traiding/exporteng.php

14 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Table 2. Import of electricity to Russia, 2010-20115

Import of electricity 2011 2010 Change (million kWh)

Georgia 589 1 117 -47.3%

Azerbaijan 392 203 93.2%

Kazakhstan 2 367 1 498 58.0%

Ukraine 56 81 -31.4%

Mongolia 21 21 -

Lithuania 0 3 -100%

Total imports 3 424 2 923 17.2%

3.2. Power generation industry In 2011, the total installed generating capacity of all Russian power generating facilities amounted to 223.6 GW and consisted of the following facilities:

5 Same source

15 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Chart 1. Structure of the installed power generating capacity as of 01.01.20126

0,2%

11,0% stations

Large hydropower 21,0% stations Thermal power stations

68,0% Renewable energy

The main features of the Russian power generation industry are the following: 1. The share of natural gas in the Russian energy balance continues to grow and has reached 56,2% in 2011 compared to 52,4% in 2000. The main growth took place at the expense of coal, while the share of oil remained stable at around 20%. 2. The Russian power industry is dominated by large power generating facilities: there are 59 stations with capacity exceeding 1 000 MW and 37 stations with capacity between 500 MW and 1 000 MW. 3. Only a low share of power is generated at small facilities: 1.5 billion kWh out of 1 050 billion kWh generated at centralized power supply area (approximately 0.1%). 4. The industry is heavily centralized: 90% of the industrial energy consumption is produced by the centralized network. 5. Russian possesses a large grid network: transmission route length exceeds 2.6 million kilometres. 6. The Russian power generating industry does not utilize the capacity efficiently: the average installed capacity utilization factor (ICUF) equals 52%. 7. The share of cogeneration is rather low at around 30% of the total power production7. According to the Master plan of Power Facilities Positioning until 2030, which was approved by the federal government in 2010, new generating facilities are planned with the total capacity of 173 GW. The share of thermal power stations

6 Novoselova. O.A. (9 October 2012), Global trends in the development of the renewable energy, Presentation by APBE [Russian Energy Forecasting Agency] at “Sustainable Development and Renewable Energy” Summit, Moscow, 9 October 2012. All the data on the main features of the Russian power generation industry is taken from the report. 7 Same source.

16 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation in the total installed capacity shall be reduced by 3.4 %, while the share of nuclear power stations is expected to increase by 43% (see table 3). Table 3. Capacity of generating facilities in 2010 and 2030 (planned)8

Type of generating 2010, GW 2030, GW facility

Nuclear power stations 24.3 50.5

Hydropower stations 46.1 58.6

Gas-powered thermal 103.6 140.1 stations

Coal-powered thermal 44.9 68.2 stations

Renewable energy 0.4 6.1

Total 219.3 323.5

With power demand in Russia and the neighbouring regions experiencing long- term growth, there is need to secure new sources of sustainable energy. For example, electricity demand in Russia grows with an annual average of 2% and in the Caucasian and Asian republics the growth rates are even higher. The importance of restructuring the power generation industry is also driven by the problem of the aging power infrastructure, with 60% of the country's power generation capacity having been in operation for at least 30 years. In the hydropower sector, which accounts for around 20% of the generation capacity, the average age of the infrastructure elements increases up to 40 years. Critical depreciation of the stock in the power generation and distribution sectors combined with low investment into new funds is one of the main risks of the energy industry. 3.3. Status quo of renewables in the Russian energy market As the previous section highlighted, the Russian energy production mix is dominated by natural gas, oil and coal. Russia currently uses very little of its huge renewable energy potential. The majority of estimates agree that the share of renewable energy excluding large hydro, i.e. wind, solar, biomass, geothermal, ocean, in the Russian energy mix amounts to about 1%9 or even less10, and that this share decreased during

8 Novoselova. O.A. Global trends in the development of the renewable energy, Presentation by APBE [Russian Energy Forecasting Agency] at “Sustainable Development and Renewable Energy” Summit, Moscow, 9 October 2012 9 Greenpeace Russia, Renewable Energy: http://www.greenpeace.org/russia/ru/campaigns/nuclear/accidents/chernobyl/25yrs/ren ewable-energy/ 10 Information Agency “Business Petersburg”, 21 June 2012: http://www.dp.ru/a/2012/06/20/Na_dolju_vozobnovljaemoj_jen/

17 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation the last decade due to the construction new capacity fuelled with traditional resources11. Table 4. Installed capacity of renewable energy in Russia as of 01.01.2010 (registered on-grid generating facilities) 12

Renewable energy source Installed capacity (MW)

Bio fuel 1 400.00

Hydropower (small and micro facilities) 709.00

Geothermal 76.00

Biomass 23.00

Wind 12.00

Tidal 1.50

Solar PV 0.05

Total 2 222.00

The development of wind and solar power generation in Russia, which are important renewable energy technologies in the EU, is lagging compared to renewable energy resources such as bio fuel and small hydro power. Russia traditionally has more expertise in the small and micro hydro power sector. Construction of small hydro plants(SHP) is now reaching new heights aided by the recent appearance of a number of specialist firms designing and manufacturing SHP equipment. Access to bio fuel resources, accumulated expertise in capturing bio fuels and feasible export potential generate the development of public and private projects in various Russian regions. In the current Russian renewable sector environment hydro power and bio fuel projects are more economically viable (e.g. the payback period for Russian small hydro plants equals 5-6 years). This draws the interest of industrial and commercial enterprises, which want to satisfy their own energy needs. The technologies and know how required for the development of small hydro power and bio fuel projects can also be supplied by Russian companies which gives a big advantage to these sectors in economic feasibility. Another factor contributing to the development of the small hydro power and bio fuel sectors is the support of regional governments. In those regions, where there is still a large untapped potential of the bio fuel and small hydro power, local governments express willingness to develop power generation on renewable resources and provide practical support to the renewables sector. Although this willingness is often driven by such factors as concern over the public image, and

11 Energy sector information website Smart Grid, news: http://www.smartgrid.ru/smartgrid/news/2012/08/news41/centercolumn/permanent/S martgridNewsBrief/SmartgridNewsInnerCollection/0/0/text_files/file/spravka_po_tek.pdf 12 Swiss Business Hub Russia, Renewable Energy, 2012, page 2.

18 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

PR, it still contributes to the deployment of renewable energy sources. As an example, we could mention the bio fuel potential in the agricultural Belgorod region. 3.4. Renewable energy resources potential in Russia

3.4.1. Gross potential of renewable energy sources The order of magnitude of the national potential of the renewables is estimated taking into account the availability of resources and engineering and economic feasibility. Estimates for the gross potential, technical and economic potential are shown in Table 5 below. 13 Gross potential is the equivalent of the total amount of energy provided by the available renewable energy sources. Technical potential represents energy, which can be retrieved using available technologies under the present social and environmental conditions. Economic potential is the energy equivalent, the use of which is economically feasible under the current prices on oil, gas and coal, heat and electricity, equipment, transportation and labour costs. Table 5. Potential of renewable energy sources in Russia14

Gross potential Technical Economic (million tonnes potential potential of equivalent (million tonnes (million tonnes fuel15 per year) of equivalent of equivalent fuel per year) fuel per year)

Small hydropower 360.4 124.6 65.2

Biomass energy 10 000.0 53.0 35.0

Wind energy 26 000.0 2 000.0 10.0

Solar energy 2 300 000.0 2 300.0 12.5

Low-grade heat 525 115 36

Geothermal 18016 20 115.017

Total 2 340 000 4593.0 273.5

13 Yelena Durayeva, Rosenergoservis, Renewable Energy in Russia: http://lib.rosenergoservis.ru/2011-07-20-04-56-55.html?start=2 14 Same source. 15 A tonne of equivalent fuel equals 41.868 GJ or 11.63 MWh. 16 An approximate estimation of energy sources lying not deeper than at 3 kilometres. 17 Only potential of binary cycle power plants at top-priority thermal springs was accounted.

19 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

3.4.2. Regional potential of renewable energy sources According to the estimates on the renewable energy power generation potential in the Russian regions, the most viable opportunities exist in the following areas: Table 6. Potential of renewable energy sources in Russian regions18

Renewable source Regions with the highest renewable energy sources potential

Biomass 1) South Federal District: agricultural regions (Belgorod region, Voronezh region) and Krasnodar region 2) Volga Federal District: Volgograd region, Samara region 3) North-West Federal District of Russia: Arkhangelsk region 4) Southern regions of Siberia

Small hydro power 1) North-West Federal District: Karelia region 2) Siberian Federal District 3) Far East Federal District 4) South Federal District and North-Caucasus Federal District

Geothermal 1) South Federal District and North-Caucasus Federal District 2) Far East Federal District: Karelia, Kamchatka

Tidal 1) , Okhotsk sea and White sea

Wind 1) North-West Federal District: Murmansk region, Kaliningrad region, 2) South Federal District: Krasnodar region, Volgograd region, 3) Siberian Federal District: Omsk region, Novosibirsk region 4) Far East Federal District: Khabarovsk region

Solar 1) South Federal District 2) Far East Federal District

The highest short term potential is concentrated in the South Federal District, which possess rich energy resources of small hydro power, wind energy, geothermal power and agricultural bio-waste. Several Russian and international companies (e.g. RusHydro) are at the moment conducting feasibility studies for renewable energy projects in the South of Russia (Krasnodar and Volgograd regions), with a projected total capacity of several GWt. In the southern regions there is also concrete political and business interest in the organization of environmentally friendly energy production within the framework of large

18 Kozhukhovsky I., APBE, Share of renewables in the total Russian energy generation, June 2012: www.e-apbe.ru/library/presentations/2012_06_06_REF_ISK.ppt

20 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation projects of national importance, such as the Winter Olympic Games in Sotchi in 2014 and creation of recreation and tourist resorts following the federal target programme. The North-West of Russia is another area that offers large potential for renewable energy projects. The area is rich in biomass resources, with up to 80% of the land covered in forests. The coast of the North-West of Russia also offers preferable climate conditions for wind power generation. The northwestern regions are scarcely populated and the energy supply in remote communities is currently provided by diesel power generators, which is costly compared to power production from coal and gas. In this environment the cost of using renewable energy resources in comparison with the cost of conventional energy sources is more than competitive. 3.4.3. Business potential According to expert opinion, in order to facilitate an effective support system for renewable energy projects, the largest Russian energy and industrial companies need to start initiating renewable energy projects and investing into the sector19. Such companies can cooperate with the federal and regional state institutions and secure the investments into actual projects. This will allow to create showcase projects and raise awareness of renewable energy sources in political and financial circles as well as identify the main constraints on all of the stages of the supply chain and test possible solutions. However at the moment, large Russian companies are rather reluctant to participate in renewable energy projects. Some of the Russian energy giants have established departments for the development of renewable energy projects: a) The renewable energy departments of Gazprom and are now investigating and evaluating the opportunities of using renewable bio energy on their facilities: terminals, oil and gas fields, pipe lines. b) RusHydro is developing wind and tidal energy projects. c) A large solar PV project is planned by the corporation Fortum. The company wants to construct a 100 MW power generating installation on the Tchelyabinsk GRES in order to cover the deficit of the capacity during the reconstruction of the station. d) Russian state corporations such as Rusnano and Russian Technologies have announced their participation in the feasibility studies and development of several renewable energy projects, such as the joint venture for production of wind turbines between Russian Technologies, RusHydro and Siemens. However, these developments should not be overestimated. Interviewed experts note that the main players on the renewables market, such as Russian technologies, Rusnano, RusHydro and large energy companies are focused on lobbying their own local projects with vested interest and are not contributing to the development of the sector as a whole. The future of large network projects is still directly dependent on the state support on federal and regional levels.

19 These industry representatives wish to remain anonymous

21 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

At the beginning of 2013, the Russian government announced that the investment programs of the state owned companies will be restructured and partially frozen, due to the shortcoming of the Russian budget, which showed a 1,5% deficit in the first two months of 2013. As renewable energy investments are not on the top of the agenda for the state corporations, it is likely that they will be affected by the budgetary cuts. 3.5. Drivers of renewable energy deployment in Russia Large-scale concerted development of the renewable energy sector in Russia will be driven by the need of the government, business and society to overcome the constraints and bottlenecks of the Russian economy in order to move to an innovative model of economic development. Renewable energy deployment20 will be stimulated by the following features that the Russian energy sector exhibits: 1. Need to guarantee energy supply to remote communities The established power grid network covers only about 35% of the territory of Russia. The power supply on the other 65% of the country’s territory, where about 20 million people live, is executed via autonomous power generating units. The fuel supply of these generating units is expensive and they are not environment-friendly. Securing energy supply to remote areas, which are not connected to the power grid network, including the Far Northern parts of Russia, Far East and Siberia is a matter of high importance. Up to 8 mln litres of diesel fuel and residual oil and 20-25 tonnes of coal are supplied to these regions on an annual basis. The supply is complicated by limited access to the areas and harsh weather conditions. The price of the fuel is twice higher than the market average because of the high transport costs, thus the total expenditures on the energy supply in some of the remote regions account for half of the regional budgets. In Russia only about 59% of all communities (59% of urban communities and 31% of rural communities) are connected to the gas grid. And the rate of connecting new communities to the grid is quite low because of the increasing exports of natural gas, depletion of gas deposits in use and a slow rate of developing new deposits. 2. Requirements towards development of local energy resources in energy deficit regions More than 50% of Russia’s regions incur lack of power and buy power from other regions. A proactive development of the Russian economy in recent years with not enough power generating capacities being built and the worn-out state of the existing generating capacities set challenging goals for the regional governments in the field of increasing regional power generating capacities. The construction of hydro- and coal-powered plants is limited by the strict sustainability rules, while the construction of gas-powered stations is hindered by the complexity of increasing regional gas-consumption limits existing in Russia. Developing the local energy resources including renewable sources can become a viable solution for this challenge.

20 Popel O, Renewable Energy Sources: role in the contemporary and future energy sector, 2008: http://www.chem.msu.su/rus/jvho/2008-6/95.pdf

22 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

3. Increasing prices for energy resources The prices for energy resources are increasing at fast pace. This problem is especially relevant for the inhabitants of remote regions, where the energy supply depends on energy resources imported from other regions. Gas is used to generate 55% of the energy in Russia. The gas tariffs in Russia are expected to grow significantly in the next few years. The Russian government has prepared a directive on the improvement of the state regulation of gas prices and shift to European tariffs for gas in 2014. This will lead to the crisis of the Russian gas energy generation sector, growth of the electricity tariffs and the costs of technological connection to the gas and electricity grids. 4. Fast growth of energy tariffs In Russia there is a significant gap between the wholesale prices and the energy tariffs for energy consumers. The retail prices are growing with much faster rates than the wholesale prices. The electricity tariffs for industrial enterprises have already exceeded the US price level. The growth of the energy tariffs in the last years was caused by an increase in gas prices, shortage of modern capacities and need to upgrade and renew the power generation assets, transfer of the grid to RAB-system pricing, abolishment of the regulation of sales mark-ups on the retail market, low competition in the power generation sector. According to expert estimations in 2014-2015 the energy tariffs for industry are expected to surpass the costs of own power generation on all types of renewable fuels, apart from solar energy. It is also expected that more and more industrial enterprises will opt for non-centralized power supply. At the same time the ad-hoc development of own power generation will deepen the problems of the power generation sector and will lead to further tariff growth. 5. Improvement of the reliability of energy supply Deployment of renewable energy technologies can be one of the factors contributing to the elimination of existing limitations of the grid network. One of the main objectives of the government is to create a competitive environment in the energy supply sector, especially in deficit energy systems. Russian industrial and agriculture energy consumers have been experiencing huge financial losses because of unreliable supply of energy which in total equal billions of dollars. Complications associated with connection to the grid, which are caused by the shortage of capacity, inefficiency of the connection process at grid operating companies, and other are also a noticeable risk for the Russian economy. Development of independent power generating units on renewable fuels would allow creating a regulated market of independent energy producers. 6. Development of small generation In the recent years small generation has been proactively developing. The main factors were the increasing prices on fuel and power and limitations on establishing new connections to the power and gas grids, which exist in many regions. The total capacity of large power stations built in 2001– 2007 amounts to 9.7 GW, while the total capacity of small generating units built in the same period is 13.4 GW. Small generating units built and installed in Russia operate mostly on expensive liquid fuels, as there is no feasible renewable technology in the country at the moment. Imports of

23 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

diesel-powered small power generators have increased considerably in recent years. 7. Obligations towards CO2 emissions reduction Russia participates in global environmental initiatives such as the Kyoto protocol. Among many other measures, it implies the gradual decrease of CO2 emissions in the energy sector. Currently the levels of CO2 emissions in the Russia energy sector, especially in the remote areas with autonomous power generation units are not in compliance with the international standards and recommendations. 8. Raising of environmental awareness In many Russian regions various environmental issues are becoming more relevant, e.g. in the agricultural Belgorod region 70% of the water supply is polluted with agricultural waste. Using agricultural waste as a feedstock for biogas production can help solve this problem. Environmental problems in the tourist resort regions in the south of Russia, caused by the emissions from the power generating units are also high on the agenda of regional governments as development of the tourist and recreational potential is one of the main objectives of the federal and regional governments. 9. Stimulating the competitiveness of small and large business Large Russian companies from different industrial sectors are becoming more integrated into the global markets, where they face competition from international producers. The accession to WTO at the end of 2012 contributed to the increased competition of Russian manufacturers on global markets. In order to increase competitiveness, Russian enterprises need to lower their costs. Construction of renewable energy installations is one of the most effective ways to supply energy to SMEs, which would boost the business activity in the regions. Large renewable energy installations can eliminate the barriers for the development of industry in energy deficit regions. It can also support the development of innovative segments of the economy. Maintaining the reserves of energy resources for future generations and guaranteeing long-term security of the energy supply is one of the strategic goals of the government. Mass implementation of new technologies requires a long time, so it should be clear to the government that it is better to start preparing for the structural change of the power generating industry in advance. 3.6. Challenges to deployment of renewable energy in Russia There are several reasons why the use of renewable energy in Russia still lags far behind Europe. First and foremost, it is so because of the still relatively low costs of traditional and locally available energy sources. Russia is in possession of huge oil and gas reserves, which are easily accessible and make the production of fuel and energy relatively cheap. In the segment of centralized on grid power generation the wholesale price levels will not be comparable to the costs of renewable energy power generation. In these conditions state support is required in order to develop the renewables sector. In order to keep the energy prices on the Russian market low, the Russian government imposes high export duties on all commodities. Despite the regular growth of the energy tariffs, they are still significantly lower than in most European countries, which are viewed by the federal government as one of the

24 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation key features of the Russian economy. Keeping the energy tariffs for private consumers low is traditionally seen as one of the most important social responsibilities of the state. Another reason for the underdevelopment of the renewable energy sector in Russia is an inconsistent legislative and policy framework there are only scarce government subsidies and tax incentives, and - no renewable portfolio standard. An overview of the Russian legislation and its future development is provided in chapter 4 of this market scan. Furthermore, among the population there is a weak awareness of environmental questions in general and renewable energy advantages in particular. The Russian population has rather short-term economic horizon, so investment of the budgetary funds into the mid and long term renewable energy initiatives is poorly accepted by the people. The public image of renewable energy in Russia is quite negative. Large energy giants and conventional energy suppliers have previously initiated campaigns targeted at creating an image of renewable energy sources (e.g. bio-based transport fuel) as an expensive and unreliable fuel with lower output than conventional fuels. The latter two factors lead to a low share of private investment in renewable energy projects, which along with modest state funding makes the financing of these projects very difficult. Currently private investors have many alternative investment options in the energy sector with much higher returns on investment and lower pay back periods than renewable energy projects. Another necessary step, that still has to be made is the required modernization of the grid and storage facilities, which are instrumental in the development of the renewable energy sector. In Russia, the electricity infrastructure is mostly obsolete and often dates back to the . The level of project development and project management expertise in the field of renewable energy in Russia is rather low. The performance of existing renewable energy power stations in Russia is still significantly below that of their European or US analogues. Possible reasons for that could be the use of technologically deficient equipment or insufficient know-how in the installation, operation and service of the facilities. However, the main challenge on the path of the development of renewable energy in Russia is the vested interests of the decision makers within the federal and regional governments which have strong ties with the Russian energy giants such as Gazprom and the top-10 oil companies. The owners and managers of the energy giants have significant political influence and are members of a close circle of powerbrokers. The energy companies play a big role in the Russian economy and the Russian business environment and the government energy policy is often dictated by the needs of the specific companies. At the moment the energy giants are not interested in the boost of the renewables sector and limit their activities to local image projects. In the framework of the Russian highly centralized political system, the renewables sector cannot be effectively developed without committed and unwavering support at the highest political level. All legislative initiatives and government directives need to be supported by the highest authority in order to

25 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation be practically implemented and proactively spread throughout the regions. Though renewable energy has formally been high on the Russian political agenda in the last five, the position of the Russian President remains ambiguous. Mr Putin has mentioned on several occasions, e.g. at a meeting with Valday Club members in September 2010, that nuclear energy is the only alternative to oil and gas while, in his opinion, the perspectives of renewable energy remain dim. This high-level and publicly voiced opinion underscores the reality that development of the latter is not (yet) a priority of the federal government. The manner in which renewable energy installations are treated in existing power market regulations exposes potential renewable energy investors to considerable investment uncertainty2122. The above barriers and threats to the large-scale and smooth deployment of wind, solar and CHP in Russia are discussed in greater depth in section 5.

21 IFC (2012), Financing Renewable Energy Investments in Russia: Legal Challenges and Opportunities, International Finance Corporation, Washington D.C. 22 Boute, A. (2011), The Modernization of the Russian Electricity Production Sector – Regulatory Risks and Investment Protection, PhD thesis at the University of Groningen, Groningen.

26 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

4. Policy and legislative environment 4.1. Renewable energy regulation To date in Russia, the overall prospects for renewable energy excluding large hydropower advance in a slow and inconsistent and piecemeal fashion. This negative trend can be firmly attributed to the on-going regulatory uncertainty with regard to financial and non-financial support for non-hydro renewables and the lack of transparency and predictability offered by federal as well as regional policy decisions pertaining to renewables.

4.1.1. Federal level It is useful to note that in Russia the promotion of renewable energy forms part of the federal government’s efforts to improve energy efficiency and reduce the economy’s energy intensity. The Federal Law № 261 “On energy saving and energy efficiency” of November 2009 underscored the need to increase energy production using renewable energy sources. The subsequent related State programme on “Energy saving and energy efficiency improvement by 2020”, introduced in December 2010. defines the objectives and financing mechanisms for improving energy efficiency, including the development of renewable energy sources. The programme envisages the investment of RUB 193 billion (EUR 4.83 billion) in renewable energy by 2020. However, at the time of writing (February 2013), two different and apparently contradictory incentive mechanisms have been promulgated but neither are yet implemented nor underpinned by appropriate regulations. 1. The Russian federal government began to develop the legislative environment for the renewable energy sector in 2007. In November 2007, Federal Law № 250-FZ, which amended Federal Law № 35-FZ “On Electricity”, defined and enshrined the term “renewable energy sources” in law and first introduced an “electricity premium scheme” for renewables besides other support measures:1. Priority off take obligation on distribution companies to purchase renewable energy production to offset/compensate the technical network energy losses; 2. Requirement to adopt criteria for the compensation of grid connection costs of renewable energy installations with a maximum installed capacity of 25 MW; and The electricity premiums were defined as fixed premiums added to the wholesale market price. In this planned system, certificates would be issued to qualified RES-E generation plant for accounting and validation purposes, i.e. resemble “guarantees of origin”. However, they would not be tradable in a commodity market decoupled from the actual electricity flow as is the case in “tradable green certificate systems” All support measures are only available to so-called “qualified renewable energy installations”. The regulator of the Russian wholesale electricity and capacity market, the Market Council, is responsible for approving renewable energy

27 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation generation facilities according to the following qualification criteria imposed by the federal government23: 1. Correspondence to the target values set by the state policy for supporting renewable energy; 2. Conformity of the capacity of the power generators up to the limit of 25 MW; 3. Conformity of all documents of the generating company (property, project documentation, licenses etc.); 4. Confirmation that the power generating units are in service (e.g. not under installation or repair); 5. Confirmation that the power generators are connected to the grid in accordance with the established procedures and have all required measuring equipment. In January 2009, the federal government promulgated Federal Government Order № 1-r “About main directions of the state policy in the field of increasing energy efficiency of the power generating industry by using renewable energy sources by 2020”. The order set a target of increasing the share of renewable energy sources in total electricity production and consumption in Russia to 4.5% by 2020. On 28 December 2010, the Russian government introduced a new capacity- based system of support for renewable electricity (RES-E) in Federal Law № 401-FZ (Federal Law Introducing the Capacity-Based Scheme). However, this legislation does not clearly explain the so-called “capacity delivery agreements” which are meant to be the basis of the fixed long-term tariffs nor does it explicitly revoke the existing, albeit never actually implemented, (wholesale electricity price) premium support scheme for RES-E generation. As of the time of writing, no regulatory framework for the capacity-based scheme had been finalised. On 6 December 2011 in Federal Law No. 394-FZ, the federal government actually referred to both concepts – the electricity price premium and the capacity-based tariffs – as available mechanisms to stimulate RES-E. 4.1.2. Recent regulatory developments Nonetheless, since early 2012, several promising regulatory developments have taken place. A regulatory declaration with possible positive implications especially for the Russian CHP sector are the “principles of state policy in the field of environmental development of the Russian Federation until 2030” adopted in April 2012. The principles set an increase in the share of processing waste including the production of heat and electricity as a strategic objective. Specifically, the document declares that special measures should be taken in order to stimulate the use of waste as an energy resource. In addition, these principles stress the importance of efficient and clean energy generation, though no specific measures are mentioned. In February 2012, the Ministry of Energy published a draft set of regulatory measures for the promotion of RES-E with the aim of implementing the incentive

23 As per Resolution No. 426 (3 June 2008) “On the Qualification of a Renewable Energy Generating Facility”

28 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation mechanisms outlined in the existing legislation and indicating the measures’ respective implementation dates. It is relevant, though, to highlight that the explanatory note accompanying the draft set of measures suggests the current decision-makers’ intention to move away from the electricity price ‘premium’ support mechanism and towards the capacity-based one. This is alluded to by assertions of the latter scheme’s “higher social acceptance” and “lower expenditure”24. This legislative draft was followed in October 2012 by federal government order no. 1839-r “Approval of set of measures to stimulate power generation by facilities powered by renewable energy sources”. According to the timetable set in the government order, the components of the policy package will be gradually introduced by the end of the second quarter of 2013. The set of measures will include:  technology-specific objectives for power generation and consumption and installed capacity for each renewable energy technology (RET)  simplified qualification procedures for renewable energy generation facilities  methodology for calculating minimum and maximum tariffs for energy generated using the renewable energy sources.  domestic/ local content requirements for renewable energy generation equipment and technology components  rules for establishing (the legally enshrined) “certificate” system which will act as proof of renewable energy production (possibly akin to “guarantees of origin” in the EU). Following the publication of this approved schedule the federal government has drafted several related regulations which, at the time of writing (February 2013), are being consulted on by relevant stakeholders: i) In November 2012, the Federal Ministry of Energy (Minenergo) published draft amendments to the 2020 renewable energy targets first adopted in January 2009. Table 5 below outlines the projected annual installations by renewable energy technology.

24 Ministry of Energy of the Russian Federation, Approved Draft “Set of Measures for Stimulation of Production of Electric Energy by Generating Facilities Functioning on the Basis of Renewable Energy Sources”, 10 February 2012.

29 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Table 7. Annual objectives for renewable power generation capacity installation

Type of facility 2014 2015 2016 2017 2018 2019 2020 Total

Wind power, MW 150 200 600 700 1 000 1 500 2 000 6 150

Solar photovoltaic 100 170 220 250 290 460 510 2 000 (PV), MW

Hydropower (capacity less 65 240 283 263 294 398 428 1 971 than 25 MW), MW

Biomass, MW 20 50 50 80 100 120 160 580

Biogas, MW 10 15 25 40 60 80 100 330

Total, MW: 345 675 1 178 1 333 1 744 2 558 3 198 11 031

Also in late 2012, several Russian sustainable energy experts have publicly acknowledged that the actual share of renewables in the total energy production and consumption in Russia in 2020 cannot reach its original target of 4.5% non- hydro renewable electricity. According to their opinion renewables will account for no more than 3% by 2020 provided that the country’s economy and the energy industry will not experience any significant downturns25. ii) In November 2012, changes to the participation of wind and solar PV installations in the wholesale power market (above 25 MW installed capacity) were proposed:  the introduction of capacity tenders for RES-E projects with caps imposed on the per kW capital costs. Approved bidders would receive a generation- based tariff.  Specific minimum local content shares for each component of wind and solar PV equipment iii) In December 2012, draft regulations for grid connection of qualified renewable energy installations of less than 25 MW capacity, i.e. those eligible for trading in the retail electricity market, offer the possibility of federal subsidies to cover a maximum 50% of technical connection costs (capped to RUB 10 million26) According to representatives of the Russian wind and solar energy industries, who are deeply involved in the policy dialogue and in finalising the actual measures, this package of measures will be finalised in the course of 2013. However, given past experience with delays in promulgating and last-minute changes to expected and announced regulations in the (renewable) energy

25 Kokorin A., WWF Russia, 22 November 2012: http://ria.ru/science/20121122/912203232.html 26 Equivalent to EUR 250 000 at the current market exchange rate.

30 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation sector, the timetable and the content of the proposals should be interpreted with great caution. 4.1.3. Regional level Over the past decade, several regions, such as Belgorod Oblast, , Tomsk Oblast, Volgograd Oblast27, have introduced regional legislation for the support of renewables. These regional efforts to promote renewables for electricity and heat production are placed within the overall energy efficiency policy framework imposed by the federal government (State Programme “Energy efficiency and development of the energy industry”). The main drivers for these initiatives are, inter alia, to reduce some regions’ dependence on fossil fuel imports (coal or oil) by switching to indigenous RES, e.g. biomass, small hydro or wind, and to utilize the substantial potential of agricultural (e.g. pig and poultry manure) and forestry wastes (which cause major disposal challenges). The recent Principles of Price Regulation in the Electricity Sector, approved by Decree of the Government of the Russian Federation No. 1178 (29 December 2011) provide a strong signal that retail tariffs should enable investors to recover the investments costs of renewable energy projects. Moreover, the State Programme “Energy efficiency and development of energy industry”, which was introduced in 2012, includes several potentially significant measures to support the regional deployment of renewable energy28:  Federal budget compensation to regions of up to 25% difference between the generation cost of the different renewable energy technologies (RETs) and the target price for compensation of grid losses set by grid company.  Creation of necessary infrastructure: implementation of pilot investment projects of priority RETs and financing mechanisms To date, no further details are available about these measures.

However, in practice, the market impact of the existing regional incentives, which are mainly preferential energy tariffs, is likely to remain limited. This is because the existing regulations only provide this financial support over short time horizons (maximum of 12 months) in accordance with federal price regulation principles29 and only to existing (and commissioned) installations which have already been formally approved as “renewable energy generating facilities eligible for support” by the Federal Ministry of Energy (Minenergo), and therefore not for new renewable energy generation plants. A fundamental restriction is the fact that retail electricity and network tariffs in Russia are heavily regulated. This means that regional governments are limited in their ability to offer adequate remuneration to renewable energy projects which, in general, have high investment costs (in contrast to their low operating costs).

27 IFC (2012), Financing Renewable Energy Investments in Russia: Legal Challenges and Opportunities, Washington D.C. 28 Russian Energy Agency (1 March 2012), “Latest Changes and opportunities in the Russian legislation within energy efficiency and renewable energy sources”, presentation [English-language]. 29 Item 63 of the Principles of Price Regulation in the Electricity Sector, as approved by Decree of the Government of the Russian Federation No. 1178 (29 December 2011)

31 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

The IFC's advisory Russia Renewable Energy Programme (RREP) is cooperating with the regional administrations in the Belgorod, Kaluga, Nizhny Novgorod and Tomsk regions to (i) develop regional support schemes and (ii) provide technical assistance to private-sector wind, biogas, biomass CHP, small hydro, solar and geothermal projects in these regions. It is significant to note that representatives of the Russian wind energy and solar industries30 have stated that at least for wind and solar energy, the regional initiatives will most likely not provide a strong “bottom-up” impetus for large- scale market growth. Instead, they emphasise the fundamental need for a “top- down” approach and strongly voiced support for renewables from the highest echelons of federal decision-making, i.e. put simply, renewables must be seen to be clearly supported and promoted by the Russian President and Prime Minister.

4.1.3.1. RUSTEC: IFC’s proposal to green Europe’s electricity supply by developing Russia’s potential for renewable energy31 In 2012, the IFC publicly presented its innovative and ambitious RUSTEC concept which aims to match the EU’s demand for renewable electricity in pursuit of the mandatory 2020 targets with Russia’s potential supply of cost- effective renewable energy (e.g. wind, small hydro and biomass). The proposed programme would represent Russian equivalent to the much-touted DESERTEC concept, which envisages the export of renewable electricity generated in the Middle East and North Africa (MENA) to meet at least 15% of the EU’s electricity needs by 2050. Under the flexibility measures offered by Directive 2009/28/EC (the “Renewables Directive”), EU member states can implement joint projects and joint incentive schemes with non-member “third countries” such as Russia. In this case, the consumption within the EU of the exported renewable electricity can be counted towards the respective national targets of the supporting EU member state provided that certain strict eligibility rules are met. These include:  joint projects must be “new” capacity in that they must have been constructed or refurbished after the Directive’s enactment; and  must prove that an amount of electricity equivalent to the accounted renewable electricity is nominated to the relevant Russia-ENTSO-E interconnector capacity. Currently, available financial support (feed-in tariffs, feed-in premiums or tradable green certificates) for renewable electricity generated from (relatively mature) onshore wind in EU countries ranges from EUR 50-110 per MWh, which may not suffice to kick-start a nascent renewable energy industry in Russia. Russia has significant (seasonally complementary) wind energy and hydropower resources in its Northwest region, which already benefit from existing power interconnections with its Nordic (Finland and Norway) and Baltic (Estonia, and Lithuania) neighbors. Nonetheless, the existing transmission capacity would

30 These industry representatives wish to remain anonymous. 31 This section draws on: Boute, A. and Williams, P. (2012), “RUSTEC: Greening Europe’s Energy Supply by Developing Russia’s Renewable Energy Potential” in: Energy Policy, vol. 51, pp. 618-29; and IFC (2012), Financing Renewable Energy Investments in Russia: Legal Challenges and Opportunities, International Finance Corporation, Washington D.C.

32 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation require upgrading and extension to accommodate the large-scale export of renewable electricity from Russia. In addition, power market rules would need to be altered to encourage electricity exports. In this regard, the capacity tariff of RUB 1000 (or about EUR 25) per MWh imposed on electricity exports since August 2011 has seen Finland, which is the largest importer, reduce its imports of Russian electricity by one-third and plans further reductions. Given that RUSTEC relies on relatively mature renewable energy technologies, can build on existing transmission capacities and is unlikely to face challenging social resistance in the sparsely populated Northwest region, the IFC argues that RUSTEC could make a large contribution in the short-term to the achievement of the 2020 EU targets. However, it is evident that this will need a favorable, predictable and transparent regulatory environment to be put in place in Russia as well as the committed engagement of all major stakeholders including the incumbent monopoly electricity exporter INTER RAO besides the federal and relevant regional authorities. As of the end of February 2013, the IFC is evaluating the results of an independent verification and feasibility study to assess the viability of the proposed renewable electricity exports from Northwest Russia to Europe. However, it is not clear to what extent this concept commands the support of the federal or the relevant regional governments. The absence to date of decision-makers’ backing for the RUSTEC concept means that concrete business opportunities will likely only arise in the medium- to long-term. 4.2. Administrative regulations 4.2.1. Land lease A major stumbling block for selecting and obtaining land benefitting from adequate renewable energy potential is the fact that the Russian federal land code sets very restrictive conditions on the use or conversion of agricultural land for non-agricultural purposes. According to expert estimates by the Russian Federal Real Estate Cadastre Agency (Rosnedvizhimost’), agricultural land represented 23.4% (400 million hectares) of the total Russian Federation area in 200932. Moreover, in the opinion of most interviewed stakeholders, it is likely that in practice obtaining land leases may be challenging and very costly as land owners will engage in strategic behavior 4.2.2. Construction permit and operation license While in theory the federal government’s criteria for approving qualified renewable energy generating facilities should be sufficient to prove a renewable energy plant operator possesses the required construction permit and all necessary licenses, in practice the approval process may not, in fact, be straightforward or transparent.

32 Sagaydak and Lukyanchikova (2011), Development of Agricultural Land Market in the Russian Federation, International Federation of Surveyors, Article of the Month – October 2011.

33 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Unfortunately, no “one-stop-shop” institution exists for obtaining the construction permit, so negotiating with local authorities is required. This can be tricky sometimes as the regional government might not be interested in renewables. And good land plots often lay in intersecting spheres of interests of different groups in the region, and each of these groups can have a certain influence on the decision-makers in the government. Acquiring a license is also a complex and non-transparent process. In order to apply for it, a company has to collect many papers. Also there are separate licenses for generating power, selling it to private and corporate consumers and for using and maintaining the grid. 4.2.3. Grid connection As per Resolution No. 850 (25 October 2010)33, grid connection costs for renewable energy facilities with installed capacity up to 25 MW should be covered by the government. However, as of the time of writing, it was not clear how the installed capacity would be calculated and whether investors have to pay the grid connection costs up-front themselves and then demand reimbursement or whether the government pays the costs directly to the grid operator. 4.2.4. Guaranteed and Priority grid access Under current electricity market regulations, Russia does not provide priority nor guaranteed network access for renewable electricity installations. This means that the latter are subject to the same access regime as all other electricity installations.

In theory, under the amendments adopted in 2007 to the Federal Electricity Law, the Federal Grid Company, which is responsible maintaining and developing the federal electricity transmission infrastructure, is legally obliged to cover the electricity losses on the transmission grid in priority with purchases of renewable electricity at regulated prices. This applies to renewable energy plant operating on the retail electricity market, i.e. with a maximum installed capacity of 25 MW. However, as of the time of writing, it is not possible to judge whether this legal obligation is being enforced due to the limited experience with the small number of commissioned renewable power facilities. Moreover, this priority off-take obligation does not represent a system of priority access to the network. A significant risk factor for renewable energy installations operating on the wholesale electricity and capacity market, i.e. those with a minimum installed capacity (per ‘supply point’) of 5 MW, is that the capacity-based scheme does not provide clear guarantees as regards access to (i.e. use of) the network. It does not require the wholesale market administrator (ATS) to select renewable electricity in priority. In accordance with current electricity market regulation, ATS could refuse to select the price bids submitted by the operators of renewable energy installations for their participation in the day-ahead market. The operators of renewable energy installations have thus no guarantee that they will be able to sell the electricity they produce on the wholesale market.

33 Resolution No. 850 on the Approval of Criteria for the Provision of Subsidies from the Federal Budget to Compensate for the Costs of Technical Connection of Generating Installations with an Installed Capacity not Exceeding 25 MW.

34 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

More generally, given the variable production patterns of wind and solar energy installations, the ATS and the System Operator might be tempted not to integrate the electricity produced from renewable energy in the trade and dispatching graphs. The System Operator might also exclude renewable energy from the structure of active and reserve production installations, i.e. the installations that the System Operator considers necessary to cover the minimum and maximum consumption loads, which are likely to be committed to during a given period. Indeed, when determining this structure, the System Operator takes into account reliability of supply issues as well as the necessity to “minimize the costs of electricity” generation. Russia’s Energy Strategy until 2030 announced that renewable energy installations will benefit from a system of “guaranteed connection and access” to the network. However, the Strategy does not further explain what must be understood with such a system of “guaranteed connection and access” to the network. It does not seem to intend to introduce a system of priority access to the network or a system of priority dispatch34. 4.3. Stakeholder projections The annual objectives for renewable power deployment set by the federal Ministry of Energy (Minenergo) in November 2012 are based on the assumptions that all of the measures to stimulate power generation by facilities powered by renewable energy sources will be adopted in full scope and according to the schedule of the Minenergo. However, the stakeholders of the renewable energy market are concerned that the envisaged package of measures will not be finalised and introduced in the announced time frame (during 2013). The main reasons for such concerns are the previous history of delays and numerous changes in the content of the legislative initiatives in the area of power generation powered by renewable energy sources. There are also a number of political, economic, social, market related and institutional risks (see Chapter 5) which can interfere the realization of the government plans of installing renewable power generation capacities. In these conditions the renewable power generation targets set by the Minenergo are regarded by stakeholders to be overstated.

4.3.1 Russian Energy Forecasting Agency The Russian Energy Forecasting Agency (REFA) has developed two scenarios for the installation of renewable energy capacity in 2010 - 2030. These scenarios are based on the scenarios of development of the energy industry of the Russian Federation in 2010–2030, developed by REFA with the beneficiary Minenergo.35 As the package of measures for the stimulation of the renewable power generation developed by Minenergo has been reviewed and amended several times, for the means of modelling the two scenarios REFA used the officially

34 Russia’s Energy Strategy for the Period up to 2030, as approved by Regulation of the Government of the Russian Federation No. 1715-r (13 November 2009) 35 The macroeconomic forecast used for the scenarios of the development of the energy industry of Russia is based on the economic forecasts of the Ministry of Economic Development.

35 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation announced plans of energy companies as the benchmark for the installation of renewable power generation facilities for the period before 2020 and the projected targets of the Government for the period of 2020-2030. Table 8: Installation of renewable energy capacity in 2010 – 2030

Renewable energy Maximum Basic scenario source scenario

MW MW

Wind 1 623 6 993

Photovoltaics n/a n/a

Hydropower (facilities with capacity 1 671 2 932 less than 25 MW)

Biomass 2 544 3 947

Included in the Included in the Bio gas Biomass Biomass

Geothermal 250 415

Tidal 12 14

Total 6 100 14 301

The maximum scenario envisages the most favourable internal and external conditions for the renewable power generation sector, including the annual growth rates of the economy reaching 6,5% and the advanced growth rates of the energy sector under an innovative development model. The basic scenario is based on the assumptions that the development of the energy sector and the economy will be hindered by resource limitations. The basic scenario envisages a sustainable growth of the economy based on the realization of the main government stimulating programmes in priority sectors (such as power generation), high ratio of investment activity in the country and commissioning several large infrastructural projects. The basic scenario is based on the forecast of stable GDP growth rates of 3-4%. The scenarios use adjusted macroeconomic figures, fuel prices, tariffs for power and heat and take into account the investment programmes for the given period. Thus, according to an independent stakeholder REFA under the most realistic (basic) scenario the total capacity of renewable power generating installations in 2030 equal a little more than 6 GW. This is almost twice lower than the draft plan of the Minenergo for 2020. The maximum scenario for 2030 is 14,3 GW, which is only 30% higher than the Minenergo targets for 2020 in the Draft Decree.

36 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

5. Potential barriers and threats for the development of the renewable energy sector 5.1. Economic 1. Substantial quantities of conventional energy sources available in the country 36. Russia has large reserves of coal, oil and natural gas. The government supports traditional fuel industries and nuclear energy as these industries are crucial for the Russian economy (generate more than half of the Russian GDP) and have traditionally received support from the government. Energy companies have significant lobbying opportunities over political and economic decisions of the Russian government. Companies operating on the coal, oil and natural gas markets enjoy various fiscal, financial and other concessions from the government. There are no such support measures for the renewable energy as to date. 2. Relatively low prices of conventional fuels37. Large reserves of traditional fuels enable for relatively low prices on oil, gas and . Although, liberalization and reforms have taken place in different segments of the Russian energy sector in the last few years, the federal government still directly or indirectly regulates tariff policy and sets maximum prices. In this environment renewable sources of energy cannot compete on the cost basis with conventional energy sources. Nevertheless, the energy prices show a strong growth tendency so this barrier may become less challenging in the future. According to estimates, if the wholesale electricity prices grow with 35-40%, the gap between pay back periods of traditional power generation installations and renewable power generation installations will decrease to several years, which will allow to make investments into renewable energy more attractive, especially together with the other advantages of renewable energy – lower risks of changes in government regulations, growth of distribution tariffs and infrastructure payments. 3. Monopolistic energy markets. All segments of the Russian energy markets are heavily dominated by one or several companies, which are often state-affiliated. Under these circumstances the market entry barriers for small and even medium-sized producers can be exceptionally high38. 4. High prices on the renewable energy technologies. At the moment renewable energy technologies and equipment in Russia is too a large extent imported, and thus expensive. It becomes a budgetary

36 Shkradyuk I.E., WWF Russia, Trends of Development of Renewable Energy Sources in Russia and Other Countries, 2010: http://www.rgo.ru/wp-content/uploads/2011/02/Renewable.pdf, Interviews with Vladimir Golubin, Deputy Director for Strategy and Regional Policy at the Southern Power Engineering Centre, and an expert on the Russian solar power industry, who preferred to stay anonymous. 37 According to an expert from a stake holder affiliated with the Federal Government, who also performs feasibility studies for state and private projects in the energy sector. 38 According to Vladimir Golubin, Deputy Director for Strategy and Regional Policy at the Southern Power Engineering Centre.

37 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

burden for regional and municipal governments which often act as co- investors in renewable energy projects. The tender procedures in Russia are also a substantial barrier for foreign suppliers of renewable energy technologies. All procurement of state organizations in Russia is organized via tenders. The main decision factor during the tenders is the price (75% share in the decision), such characteristics as quality, years of services, relevance is not taken into account. Thus, European producers of equipment find it hard to compete with Chinese and Korean producers which offer much lower prices. 5. Shortage of economic independence of Russian regions. Most of the Russian regions are subsidized by the federal government and do not have a practical long term approach to the development of renewable energy in the regions, which can allow changing the energy sector structure and lowering energy costs in the future but requires significant upfront investment. 6. Lack of economic feasibility39. The largest constraint for the development of renewable energy in Russia is the low economic feasibility. Existing renewable energy projects have proven to be unprofitable. Feasibility studies, conducted by the Energy Efficiency and Power centre of INTER RAO, for various projects in different regions (e.g. Belgorod, Krasnodar, Omsk, etc) for power generation installations, fuelled by various renewable sources (biomass, wind, solar) have shown that without state support the projects are not economically feasible. The private sector does not want to invest in renewable energy projects as the financial conditions of such investments cannot match the return on investment on traditional markets. The government in turn does not want to increase the burden on its budget in the conditions when it needs to allocate funding to many social initiatives. The population will not approve of such budget expenses as the awareness about renewable energy in Russia is very low. 5.2. Financial 1. Lack of established financing tools40. There is to date no established financing instruments for funding renewable energy projects in Russia. Large Russian financial institutions, such as GazpromBank and Sberbank have opened up departments responsible for financing projects in the area of energy efficiency and renewable energy. But such initiatives are generally targeted at creating a positive image of the organization and are seen as elements of the corporate governance and social responsibility policies. Expert from Sberbank emphasized that the activities of this department are limited to the investments into several projects targeted at establishing production of biomass fuels which have high export potential (production and export of wooden pallets).

39 According to an expert from a stake holder affiliated with the Federal Government, who also performs feasibility studies for state and private projects in the energy sector. 40 According to an expert on the Russian solar power industry, who preferred to stay anonymous.

38 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

2. Risks of non-payment41. The payment discipline of public and private entities, large energy consumers, is rather poor. Payment delays or failure to pay for the consumed energy are common, especially in remote regions and during economic downturn. This may become a significant risk for suppliers of renewable energy especially at early stages of the project. 5.3. Social and cultural 1. Low awareness about renewable energy42. The Russian population, management of organizations and the society in general are poorly informed about the opportunities of renewable energy. There are no ongoing awareness campaigns in the media about the advantages of using renewable energy; there is lack of information on experiences of using renewable energy sources to generate power in Russia and foreign best practices. 2. Low environment awareness. Generally Russians have low environment awareness and no environmental consumption culture. There is a trend for this situation to change, but at present the authorities do not pay much attention to solving environmental issues of the Russian economy, as there is no strong public demand and intent in this area. 3. Stereotype that renewable energy can be dangerous43. The negative image of the renewable energy sources in Russia is created by information campaigns organized by oil and gas producers and suppliers. Even the President of the Russian Federation has noted on several occasions that wind and solar power generations might have a negative impact on the environment. In remote regions, where power generation fully relies on diesel generators and diesel fuel costs equal twice as much as in central regions of the country, suppliers of the diesel fuel have been using the media to create a dangerous stereotype of renewable fuels in the society in order to place market entry barriers for potential alternative fuel suppliers. 5.4. Political and institutional 1. Lack of political will44. As mentioned before, in Russia there is lack of political will to develop the renewables sector in the top political circles. As the governance model in Russia is highly centralized and autocratic, without a direct initiative from the President to jump start the development of the sector, none of the state programs and targets will be implemented to the full extent. The government has vested interests in the oil & gas sector and the electricity producers so most of the market experts agree that the actual

41 Same source. 42 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia, and an expert from a stake holder affiliated with the Federal Government, who also performs feasibility studies for state and private projects in the energy sector. 43 Same source. 44 According to an expert on the Russian solar power industry, who preferred to stay anonymous and an expert from a stake holder affiliated with the Federal Government, who also performs feasibility studies for state and private projects in the energy sector.

39 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

development of the renewables sector is not on the agenda of the current political power circles. Nevertheless, if the political will would exist, all the legislative and technical constraints could be easily dealt with in the shortest time frames. 2. Lack of governmental support45. At the moment there are no working mechanisms for the support of renewables in Russia (e.g. tax preferences, subsidies, compensations, preferable loans). Over the recent years the federal government started to show interest in the development of renewables in Russia. But according to the experts, the concrete supportive tools are still to be created. Now, Russian legislation is only at a preparatory stage to adopt measures aimed at support of the renewable energy sector. 3. Lack of prioritization.46. The development of the renewable energy sector can be slowed down by the lack of prioritization in the state renewables policy. The Russian government is attempting to develop all segments of the renewable energy sector at once, while it might be more effective to focus on those where the potential is most evident and where Russia possess the required experience and expertise, for example small hydro power or biomass. At the same time the current renewable energy policy in Russia stimulates the construction of power generating installations but not the production of electricity. In this aspect, further prioritization is also required from the government. 4. Dependence on the local governments (personalization risk)47. In Russia local authorities have much power in their regions. They can provide support in areas, where the federal government has no on-going programmes and initiatives. In some regions (e.g. Belgorod and Rostov) the regional authorities have a positive attitude towards the renewables, which enabled for launching several projects there. However, not all of the regional governments are cooperative in the development of the renewable energy. Also, changes in the top positions of the local authority bodies often lead to substantial changes in the policies up to adopting a complete contrary legislation or regulations.

45 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia, Vladimir Golubin, Deputy Director for Strategy and Regional Policy at the Southern Power Engineering Centre, an expert from a stake holder affiliated with the Federal Government, who also performs feasibility studies for state and private projects in the energy sector and an expert on the Russian solar power industry, who preferred to stay anonymous. 46 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia. 47 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia and an expert on the Russian solar power industry, who preferred to stay anonymous.

40 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

4. Strong lobby of oil and gas producers48. Oil and gas companies have a large influence on the relevant authorities at the federal and local levels. Naturally, they do not want to have a strong alternative energy sector, and speak out against state support and subsidies for the renewables sector. The energy producers have strong ties with many of the Russian federal and regional officials, including financial interests of the latter in the largest energy companies. 5.5. Legislative 1. Inconsistence of legislation49. Despite the recent legislative improvements the procedure utilizing the energy produced by independent suppliers is not established. It is possible to use the produced energy for internal needs, but the procedure of obtaining various permits is complicated and long. Selling the energy to the grid according to the current legislation is not possible at all, and this greatly hinders the development of renewables in Russia. Experts also noted out the lack of legislative documents on the stimulation of heat production on the basis of renewable fuels by collective and individual consumers of electricity. 2. Lack of established legal framework50. There is a lack of a framework of legal documents to support the existing legislative initiatives in the area of renewable energy. Though the general elements of the policy are defined in the state program and federal laws, there are no legal documents with practical guidelines for the implementation of concrete measures, such as connection of independent suppliers to the grid. 5.6. Environmental 1. Harsh terrain and weather conditions51. Some areas of Russia, which have a good potential for renewable energy, have very severe climate and terrain conditions. The technologies of European and American equipment manufacturers not always can sustainably function in Russia and need to be adapted to the Russian context. This is especially relevant for the wind generation sector in the North-West Federal District, Siberia and the Far East.

5.7. Market-related 1. Lack of investor confidence52. Renewable energy is always considered to be more expensive than conventional fuels. The long pay back periods of renewable energy projects and higher returns on investment into general power infrastructure, lower investor confidence in renewables projects.

48 Same source. 49 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia and an expert on the Russian solar power industry, who preferred to stay anonymous. 50 Same source. 51 Vladimir Golubin, Deputy Director for Strategy and Regional Policy at the Southern Power Engineering Centre. 52 Same source.

41 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Nevertheless, some projects in the renewable energy field may still be profitable in current non-favourable conditions. This first of all relates to remote communities which now function on diesel generators. In many remote towns located in the North of Russia diesel generators are widely used, and the price of energy can reach up to $1 per kW. In such circumstances renewable energy can already be cheaper even with high technological costs. 2. Lack of success stories53. Lack of successful projects, which would function for 5-6 years, is a big problem for the Russian renewables sector, as the potential investors are afraid to take up innovative projects without seeing a good example. Most of the projects launched in the beginning of the 2000s, especially in the wind energy sector, have been frozen or closed down due to poor financial performance. It is recommended for the government to support investors in creating and maintaining several projects in different segments of the renewables sector (wind, solar, biogas) in order to create show case examples of successful long term projects. 5.8. Technical and infrastructure-related 1. Lack of established technical procedures54. There is no consistent technical documentation regulating the metering, connection to the grid and other technical procedures for the renewable energy sector. 2. Lack of infrastructure and inefficient infrastructure management55. Transport of equipment and fuel is one of the key infrastructure constraints. The Russian road network covers only a limited area of the country. It is in rather good conditions in the Northwest, Central, South and Volga Federal Districts, but enormous territories of the Urals, Siberia and Far East Federal Districts have a very poor road network, connecting only the largest cities. In most of the cases each community, even if it is a large city, is connected to another by one road, so transportation of large freight can block all the traffic. 3. Lack of technologies56. The Russian solar, wind and CHP sectors have been underfinanced for a long time, so there is a lack of available local technologies. It is possible to produce the equipment in Russia, but it requires investments of both time and money and has no direct potential in the short to medium time terms.

53 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia and an expert on the Russian solar power industry, who preferred to stay anonymous. 54 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia and an expert on the Russian solar power industry, who preferred to stay anonymous. 55 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia. 56 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia, and Vladimir Golubin, Deputy Director for Strategy and Regional Policy at the Southern Power Engineering Centre.

42 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Currently the level of public and private investment into R&D of renewable energy technologies with high market potential is very low. One of the few operating start-up funds in the renewables sector is the Skolkovo fund, which at the moment provides financing to 33 projects, most of them on the seed stage of development. The majority of these projects (70%) are in the wind power generation segment and the tidal power generation segments. 4. Lack of standardization of equipment57. Currently there is no appropriate infrastructure for the standardization and certification of high-tech equipment, used in renewable energy projects. 5. Lack of qualified staff58. During the time of stagnation of the solar, wind and CHP sectors in Russia, a lack of qualified specialists in these fields appeared. Imported new technologies require updated expertise from the existing professionals. The lack of qualified staff is not a significant problem for the solar power sector, as education in this field can be arranged in a form of rather short courses for engineers. But for the wind generation sector the lack of staff is one of the major problems. A few years ago major Russian sector universities have started training specialized staff for the renewables sector: Moscow Energy Institute, Bauman Institute, sector universities in St. Petersburg, Yekaterinburg, Novosibirsk, Khabarovsk), but the level of practical skills is still lagging behind. The largest deficit in Russia currently staff which services the installations and technicians. But the largest problem is the staff, which manages the power generation installations. There are no practical innovators in Russia who have experience working with state of the art technologies.

57 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia. 58 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia, Vladimir Golubin, Deputy Director for Strategy and Regional Policy at the Southern Power Engineering Centre, an expert on the Russian solar power industry, who preferred to stay anonymous and an expert from a stake holder affiliated with the Federal Government, who also performs feasibility studies for state and private projects in the energy sector.

43 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

6. Wind energy sector 6.1. Wind energy resource potential and regional potential across Russia Russia’s wind energy potential varies substantially over its vast land area. The 59 Russian Wind Atlas shows that there are numerous areas where the annual mean wind speed exceeds 6.0 metres per second (m/s). Figure 1 shows wind resources at 50 metres above ground-level for five different topographic conditions. The colours in the first column of the table match the colours in the figure. Mean wind speeds The highest mean wind speeds are found along the coasts of the Barents and Kara seas, the Bering Sea and the Sea of Okhots. Other areas with relatively high wind speed (5-6 m/s) include the coasts of the East-Siberian, Chukchi and Laptev seas to the north and the Sea to the east. Slightly lower wind speeds (3.5-5 m/s) are found on the coasts of the Black, Azov and Caspian seas in the south and on the White Sea in the north-west. Good resources are also found in the low and middle Volga regions, the Urals, the steppe areas of West Siberia, and around the Baikal Lake. The lowest mean wind speed occurs over East Siberia in the Lena-Kolyma core of the Asian anticyclone. Wind speeds during the night and day time Across most of Russia, wind speeds are greater in the daytime than at night, although this variation is much less pronounced in the winter. The annual variation in mean wind speed (i.e. the difference between the maximum and minimum mean daily speeds) is insignificant for most parts of Russia. The annual amplitude varies from 1 to 4 m/s, making up 2-3 m/s on the average. Amplitudes are higher over the center of the European part of Russia, East Siberia, West Siberia (except for northern areas) and especially in the Far East where amplitude reaches 4 m/s. Annual amplitude of less than 2 m/s is observed over the south-west and south-east of the European part of Russia and over Central Siberia60. Wind speeds throughout the year In most of Russia, wind speed is greater in winter or autumn, except for the southern part of Central Siberia where maximum wind speeds occur in warmer months. The highest speeds over Yakutia and the Trans-Baykal Region are observed in April-May.

59 Riso National Laboratory and the Russian-Danish Institute for Energy Efficiency, Russian Wind Atlas, 2000. Wind speeds are based on 8 observations (every 3 hours) at 332 meteorological stations in Russia over 10 years. 60 Same source.

44 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Figure 1. Wind energy resources of Russia61

61 Same source.

45 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Several attempts have been made to estimate the exact potential of wind energy in Russia, beginning with the Wind Atlas published in the Soviet Union in the 1930s. According to the National Register of Wind Resources of Russia the technical potential of wind energy in Russia equals about 1 637 GW, which is almost 15 times higher than the actual average output of all power stations in Russia. Below there is a map of technical potential of the wind energy. Figure 2. Technical potential of the wind energy in Russia (billion kWh).

The economic potential of the wind energy in Russia amounts to almost 250 billion kWh per year. That equals 25% of Russia’s total annual energy consumption62. In Russia the areas favourable for installing windmills are the regions lacking the centralized power supply. There are 70 towns, 360 urban-type communities and about 1400 small localities in these areas. In these settlements about 50 000 diesel generators with the total capacity of 7 GW and the total annual output of about 50 billion kWh are used to supply the households, institutions and industries with power63. Experts believe that the feasibility of construction of wind power generating facilities in these regions is very high64.

62 Energy Efficiency Portal developed by the Ministry of Economic Development, Constraints for Wind Energy Development in Russia, 12 October 2012: http://www.newenergy.gov.ru/newenergy/building_alt/20356/ 63 RAWI, Review of the Russian Wind Energy Market, 2012, page 8. 64 Ministry of Energy, Prospects of Development of Alternative Energy in Russia, 2012, page 5.

46 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

The Russian Ministry of Energy, RusHydro and the Russian Institute of Energy Strategy consider it realistic to generate up to 7 GW of electric energy at wind power plants by 2030. The regions with the highest potential to establish the power plants and with active state support programs are the following: 1) Southern Federal District (Volgograd, Krasnodar regions, Belgorod region), 2) Northwest Federal District (Murmansk, Arkhangelsk regions), 3) Siberia (Novosibirsk, Tomsk regions), 4) Far East Federal District ( region, Kamchatka)65 In many remote regions the practical potential of wind power generation lies in the deployment of multifunctional energy technological installations, which combine diesel generators with wind power generators. 6.2. Current state of the sector and future prospects After the closure of RAO EES, RusHydro is the state related organization monitoring the development of the wind energy sector and managing the main wind park projects. Currently about 10 wind parks with the total capacity of about 12 MW66 are installed in Russia. Besides that there are about 1 600 small wind generators. Almost all wind parks were constructed in 2002–2003. However, large-scale commercial wind energy production has been having a difficult stand so far in Russia due to the constraints and barriers reviewed in chapter 5 of the report. The existing wind parks do not operate on full capacity and are either partially frozen or closed down. The main reason for this according to the representatives of the Energy Efficiency and Power centre of INTER RAO is that these projects were initially created as show-case and image projects, funded by development organizations and funds and were not economically feasible. The operational and service expertise of the project managers is also rather low which does not allow to manage the projects in an effective way. Below there is a table of operational wind energy facilities. The present list is not excessive as there is no official statistics on the number and capacity of wind power generating facilities in Russia. It is also important to note that all wind parks and wind generation facilities in Russia are onshore.

65 Ministry of Energy, Prospects of Development of Alternative Energy in Russia, 2012, page 4. 66 Kulakov A., Renewables and alternative energy supply systems: http://www.energosovet.ru/bul_stat.php?idd=213

47 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Table 9. Annually installed wind energy capacities67

Launch Name Capacity Actual Federal Instigator year (MW) generation district, (million region kWh)

1994 Kalmytskaya 1.0 - Southern RysHydro Wind Power District, (83.4%), Station Southern MRSK68 (16.6%)

1996 Markinskaya 0.3 - Southern Rostovenergo Wind Power District, Station Rostov Region

1996 Zapolyarnaya 1.25 - North West Komienergo Wind-Diesel District, Power Plant Vorkuta Region

1997 Marposadskaya 0.2 - Volga Chuvashenergu Wind Power District, Station Chuvashiya

1998 Nikolskaya 1.2 0.78 Far East Kamchatskenergo District, Bering Island

1998 Zelenogradskaya 5.1 3.6 North West Kaliningrad Wind Power District, Generating Station Company Kaliningrad Region

2002 Anadyrskaya 2.5 0.2 Far EastChukotkommunkhoz Wind Power District, Station Chukotka

2002 Tyupkildy Wind 2.2 0.3 Volga District, Bashkirenergo Power Station Bashkortostan

- VES-30069 0.3 - Southern - District,

67 AddCoss (Russian portal on wind energy), Development of Wind Energy Sector in Russia: http://addcos.com.ua/vetroenergetika/18#more-18 68 MRSK - Interregional Distribution Grid Company. 69 RusHydro, Current state, potential and opportunities of wind energy in Russia, 2011.

48 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Krasnodar Region

- VES-200 0.2 - North West - District, Murmansk Region

- - 0.1 - South - District, Astrakhan Region

Also in the Kaliningrad Region, North West District, there was a project aimed at constructing the first offshore wind park in Russia. The planned capacity was 50 MW. But the project was frozen in 200770 due to lack of economic feasibility. Apart from the abovementioned wind power facilities, which are relatively large, there are some projects of smaller scale. Unfortunately, small wind power generators installed in Russia are used only to satisfy internal corporate energy needs, so no data concerning them is available except some scarce information disclosed by the companies implying such projects. For example, the Russian oil giant Lukoil has launched a 37 kW wind power generator at its gas station at the highway connecting the cities of Ufa and Birsk both located in the constituent Republic of Bashkortostan (Volga Federal District)71. The company also mulls constructing similar small-scale wind power stations at another site in the Volga Federal District, two sites in the Northwest Federal District and another one site in the Southern Federal District72. The Russian company Elektrogaz, a technical branch of Gazprom, launched a hybrid wind-solar generator in the test mode at its manufacturing facility in the Krasnodar Region (Southern Federal District)73. Elektrogaz also constructs another wind power generator in at the natural gas pipeline in the Stavropol Region (Southern District)74. In recent years the main developments in the wind energy sector are mostly associated with the installation of small wind power generating facilities (1–5 kW)75. Russia has a long history of small-scale wind turbines located in agricultural areas with low population density. As connection to the main energy grid is difficult there, small energy suppliers are in high demand.

70 AddCoss (Russian portal on wind energy), Development of Wind Energy Sector in Russia: http://addcos.com.ua/vetroenergetika/18#more-18 71 Lukoil, Lukoil’s experience of using renewable energy sources, 2012. 72 Same source. 73 Elektrogaz, Autonomous power supply using Elektrogaz’s renewable energy generators, 2012. 74 Same source. 75 Parmukhina E., Research Techart, Wind Energy Market, 2009: http://www.techart.ru/files/publications/%D0%A0%D1%8B%D0%BD%D0%BE%D0%B A%20%D0%B2%D0%B5%D1%80%D1%82%D0%BE%D1%8D%D0%BD%D0%B5%D1 %80%D0%B3%D0%B5%D1%82%D0%B8%D0%BA%D0%B8.pdf.

49 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Below there is a map of currently active projects in the field of the wind energy in Russia: Figure 3. Map of wind energy projects in Russia76.

 Projects marked orange are at the feasibility study stage  Green and beige are at the stage of project design and engineering;  The project marked red is already partially commissioned. Among the projects marked on the map above the following projects are on the furthest stage of preparing all the necessary documentation and undergoing the feasibility study: Table 10. Wind projects: Company name Project name MW Federal district (country) Elektrosfera Petersburg (LNPP) 75 Northwest (Russia) RusHydro (Russia) Russky Island 36 Far East RusHydro (Russia) Lower Volga 1000 Volga

Greta Energy Yeisk (Rostov NPP) 75 Southern

76 Bryzgunov I., RAWI, Current state of the Russian wind energy market, September 2012: http://rawi.ru/media/Materiali/Bryzgunov%20RAWI%20Husum_RU.pdf

50 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

(Canada) Wind №5 (Russia) Sparta 1 100 Southern Wind №5 (Russia) Sycheva Gora 1 100 Southern Falcon Capital Kalmykia 300 Southern (Czech Republic) Windlife Energy 200 Northwest (Netherlands) VentRus (Russia) Orenburg 150 Volga VentRus (Russia) Altai 150 Siberia

6.3. Bottlenecks along the wind power supply chain Manufacturing The small Russian wind turbine market is dominated by international companies. Table 11. Wind turbine manufacturers’ share of the Russian market77

Turbine producer No. of installed turbines Total installed capacity (MW)

Vestas 20 4.5

AVE 10 2.5

Vensys 2 2.4

Hanseatische AG 4 2.2

Raduga 6 1.5

Micon 4 1.0

Wind World 1 0.6

Russia has no major domestic producers of windmills that can compete with the major international players in this sector. In Russia there are only few companies producing wind turbines and components, which are applicable in the commercial and industrial sectors (small capacity). Also there are about 10 producers of low-capacity wind generators (up to 1 kW)78. As an indicative sign of the stagnation of the the joint venture between Siemens, RusHydro and the state-owned technology conglomerate Russian Technologies to establish a wind turbine manufacturing base in Russia (for 1.3 – 3.6 MW turbines) which was agreed in July 2010 has not progressed. It was indicated to the project team by one of the sources that Siemens is backtracking on the JV due to a lack of expected economies of scale in the Russian market – Siemens

77 EWEA, Eastern Winds – Emerging European wind power markets, 2013, page 114. 78 Russian portal about wind energy Wetroenergetika: http://www.wetroenergetika.ru/28%20%20proizvoditeli.html

51 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation suggests that a minimum 1 GW of planned capacity installations would be necessary in Russia and neighbouring CIS countries for the manufacturing facility to be profitable. Siemens’ decision is most likely linked to the continued lack of progress at the federal level for implementing RES-E incentives to back up the longstanding 2020 target for RES-E (excl. large hydro). Logistics The most favorable regions for developing wind energy are the North-West, Siberia and the Far East of the country, which are situated far from Europe and are not easily accessible by the main transport routes. Russian manufacturers of wind turbines are also located mostly in the Central Federal District. Thus, wind power generators and spare parts have to be transported across the whole country. Also the most favorable sites are often located in the areas with no road or railroad infrastructure. And remote locations, which are the main potential market for wind generators are not always accessible (e.g. in winter some of the remote villages are accessible only by helicopter, but in case of snow storms these localities become completely inaccessible). Staff Qualified staff is one of the main constraints of the industry’s development. Small and remote localities have a lack of qualified specialists. It is so because small localities do not have high schools to provide the necessary education, and educated specialists do not want to go to such towns and villages, even if they were born there79. Bearing in mind that Russia is going to import a lot of technologies, Russian professionals are going to need to update their expertise. In this case it may prove fruitful to organize an educational institution, which would help Russian specialists to get acquainted with foreign equipment. In order to facilitate the development of the wind energy sector in Russia, it would be fruitful to arrange internships of Russian professionals at power plants abroad, where they can see how the equipment actually functions and how it is maintained80. Operation & Management The experts of Inter RAO noted that the projects which have been implemented in the wind power sector have failed to generate any income and were frozen or closed down due to the low efficiency. The problems were caused by the bad preparation of the projects, as many of them (e.g. wind park in Kaliningrad constructed by the Danish Energy Agency) were designed as showcase projects without conducting a profound feasibility study including the study of the specific Russian conditions. The wind power station in Kaliningrad has a capacity of 5,1 MW and provides energy only to 15 houses and several farms. The wind speed in the area does not match the figures used in the calculations, thus, the installation does not generate enough power. The losses of the project account to almost 250 thousand Euro per year with another 10 thousand spent annually on maintenance.

79 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia. 80 According to Vladimir Golubin, Deputy Director for Strategy and Regional Policy at the Southern Power Engineering Centre.

52 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

6.4 Case study and lessons learned The Dutch company Windlife Energy (Windlife) has been developing a large scale project for the construction of a 200 MW wind park in the of the Murmansk region for more than ten years. This area of the Murmansk region has some significant advantages: a) High wind speed because of the air pressure difference between the sea and land (average wind speed on the seashore is 10 m/s, declining to 8 m/s land inward). b) The area is scarcely populated. c) HV lines with sufficient capacity are available. d) The area provides good accessibility to potential markets: Norway, Finland (and further onto European markets), major new Gazprom/ Shtokman gasfield, others. The first pre-feasibility studies were executed in 2001, but the economic feasibility of the construction of a wind power capacity was not proven in relation to the current electricity prices. In 2007 the project was revived and received approval and support of the regional government of the Murmansk region, which allowed Windlife Energy to start the active preparation stage. The feasibility study conducted in 2008 showed a feasibility to install 200 MW of grid connected wind energy on four sites. According to the project specifications the first wind turbine was to be launched in 2011 and the second turbine in the end of 2012. The costs of each of the two stages of the project (per turbine) were expected to reach EUR 150 mln. The budget of the project has later increased from EUR 150 to EUR 300 mln for one stage (wind turbine). The planned number of staff of the wind park was estimated at 100 professionals, mostly of Russian nationality. Most of the components for the installations would need to be imported, as only minor parts of the installations can be procured in Russia. Windlife finalized all pre-development stages of the project, such as receiving the required permits (land option agreement for 60 km2 and a building permit), signing a PPP agreement with the regional government, a preliminary installation protocol, initial wind measurements, preliminary PPA with a regional wholesale company. Nevertheless, the project is still in the development stage and the due dates for the commissioning of the first turbine were delayed to 2014. The bottlenecks faced by Wildlife in this project can be viewed as lessons learned for developing win power generation projects in remote Russian regions with high wind potential: 1) Adequate legal support mechanism from the Russian government is required in order to facilitate large scale projects such as the Murmansk wind park and make them financially viable. The installation of the legal support system was expected from the government for the last several years and the uncertainty of the plans of the government stalls the development of such projects as the Windlife wind park in Murmansk.

53 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

There are no federal or regional support mechanisms for wind energy projects in place. The regional government has formally supported the project and signed the Protocol of public-private cooperation with Windlife on the wind park project in April 2008. The Declaration of Principles for the project was accepted by the Interdepartmental Commission of the Murmansk region. Nevertheless, the regional and municipal authorities have not provided any concrete support to the project, e.g. subsidy on the capacity basis or guaranteed long-term tariffs. Without the support measures envisaged in the Draft Decree of the Russian government in October 2012 the payback period of the Murmansk project equals 15-16 years. The Windlife project team estimate the payback period after the implementation of the support mechanism to reduce to 7-8 years. 2) Local energy players are likely to claim a stake in the project. They follow their vested interests and would like to have control over all activities in the region, which can change the playing field of the energy market. Windlife has signed an MOU with Atomenergomash, the Russian subsidiary of the Rosatom. Atomenergomash will have a 51% share of the Russian subsidiary of Windlife which will operate the Murmansk project. 3) One of the main risks for all renewable energy projects is the political playing field in a specific region. It is important to have on board the project an influential local business partner, with good connections in the state institutions. The interest of the regional government in the project and the level of support provided to the project greatly depend on the specific personalities in the regional administration and their involvement. As the regional governments in Russia change regularly, there is a large risk that the new government will introduce a new policy in the area of renewable energy and will reconsider the existing arrangements. This happened in the Murmansk region, where the government changed three times since 2001. 4) The weather conditions in the northwestern Russian regions are very harsh. The equipment and the technologies need to be adapted to work effectively in such conditions (implement solutions to detect the icing), and the design of the project should consider possible risks to the project caused by the weather conditions. For example, in the Murmansk region Windlife encountered problems with severe icing of the wind turbines. It was required to reposition the wind park and move it further away from roads and other infrastructure. 5) The state of the general infrastructure in Russia is very poor. For large scale projects in remote areas the general infrastructure needs to be created from scratch. For example, the access to the site of the Windlife wind park was provided with one single road of poor quality, which had to be completely reconstructed. 6) One of the main constraints for the means of implementation of a renewable energy power generation project is the access to the electricity market. Murmanskenergo, the largest supplier of electricity in the region, was not interested in buying electricity from the Windlife wind park, without having a stake in the project (see point 2). A solution could be the connection of renewable power generation installations to large local projects, namely hydro power and nuclear energy facilities.

54 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

7) The wind potential in Russia is concentrated in northern and rather remote areas. Generally in these areas there is insufficient capacity of transport and storage of energy, as they are situated far from the main consumer markets. Underdevelopment of the transmission network complicates the supply of energy to customers in Russia and in Europe. There is no connection of the Windlife site with potential markets in Europe (Finland, Norway and further). 8) Obtaining the required financing for a large scale project is a challenge. This is one of the reasons while many projects are stalled on the development stage. Windlife received an LOI from EBRD and IFC for future financing of the Murmansk project, but financial institutions would like to have co- financing parties involved, such as turbine manufacturers, local energy parties. Private investors are still cautious in investing in wind energy projects in Russia due to long and highly unpredictable payback periods. 9) Obtaining a land option in Russia is a complicated procedure. In 2009 Windlife has received a land option agreement from the Murmansk region cadaster. The land act and resolution are valid for three years (starting March 2010) and need to be prolonged. 10) The procedure of technological connection to the grid is extremely complicated. The Windlife project stalled in 2011 on the stage of applying for the technological connection to the grid. The mechanism of grid connection in Russia is over complicated and involves numerous expertise and approvals by the authorities. The application process was initiated by Windlife with MRSK (grid owner) in 2009 but took much longer than expected in the project planning (1,5 years). The connection was acquired only in 2012. Windlife still needs to develop and execute a grid connection plan with assistance from Dutch companies, such as KEMA. 11) Another potential project risk is the conflict with the Russian military sector, which is well established in the remote areas of Russian northern and southern regions and monitors and controls all construction and infrastructure projects. The process of receiving approval from all stakeholders is a timely procedure, which lengthens the project. In 2012 IFC/Worldbank came up with the RUSTEC concept based on the DESERTEC, the Mediterranean Solar Plan. The concept envisages European states buying green energy which would be produced in the Russian Federation (for more details see Chapter 4.1.3.1). Windlife is investigating opportunities to increase the capacity of the Murmansk wind park dedicated to power delivery under the RUSTEC concept, if the Netherlands decides to buy green energy from Russia. In this case, the Dutch government and IFC can provide the required support to the project.

55 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

7. Solar energy sector 7.1. Solar energy resource potential and regional potential across Russia Solar radiation depends largely on latitude, i.e. it is strongest at the equator and diminishes towards the poles. Russia is located between 41 and 82 degrees north latitude, and solar radiation levels vary considerably. According to Russian estimates, the average solar radiation in the remote northern areas is 810 kWh/m2 per year, while in the southern regions it is more than 1400 kWh/m2 per year81. Solar radiation levels also exhibit great seasonal variations. For example, at latitude 55 degrees solar radiation is 1.69 kWh/m2 per day in January, and 11.41 kWh/m2 per day in July. Experts estimate gross solar energy potential in Russia at 2 300 000 million tonnes of coal equivalent (mtce), technical potential at 2,300 mtce and economic potential 12.5 mtce per year82. Solar energy potential is greatest in the south- west (North Caucuses, the Black and regions) and in Southern Siberia and the Far East. In some parts of Western and Eastern Siberia and in the Far East, the annual solar radiation is 1300 kW/ m2, exceeding levels in the Southern regions of Russia. For example, incoming solar energy reaches 1340 kWh/m2 in Irkutsk (52 degrees latitude), and 1290 kWh/m2 in Yakutia-Sakha (62 degrees latitude)83. Tables 12 and 13 show annual data for solar radiation incident for five locations in different climatic zones. Astrakhan and Sotchi are located in the Southern European part of Russia, Kyzil and Mangut in the Southern Siberia and Vladivostok in the Far East84. Table 12. Total Solar Radiation Incident on Horizontal Surface (MJ/m2)

I II III IV V VI VII VIII IX X XI XII Yearly

Astrakhan 137 202 371 528 690 737 719 651 477 301 144 94 5 051

Sochi 152 211 347 458 599 737 743 647 485 345 190 131 5 045

Kyzil 127 225 454 556 680 706 683 585 429 273 143 101 4 962

Mangut 187 285 485 572 692 665 605 569 436 321 206 148 5 171

Vladivostok 247 323 488 519 612 538 513 480 456 364 250 206 4 996

81 World Renewable Energy Network, The Prospects for Photovoltaic Development in Russia,” Renewable Energy, 2001. 82 Yelena Durayeva, Rosenergoservis, Renewable Energy in Russia: http://lib.rosenergoservis.ru/2011-07-20-04-56-55.html?start=2 83 Institute of Physics and Technology, Energy on the Eve of the New Millennium: Estimation of Renewables’ Potential in Russia, 1992. 84 IEA, Renewables in Russia, 2003, page 32.

56 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Table 13. Direct Solar Radiation Incident on Surface Perpendicular to Sunlight Rays (MJ/m2)85

I II III IV V VI VII VIII IX X XI XII Yearly

Astrakhan 183 244 363 489 651 728 723 689 569 392 194 114 5 339

Sochi 209 221 325 378 494 647 691 634 528 436 271 178 5 012

Kyzil 183 267 506 549 658 673 648 617 557 383 194 128 5 363

Mangut 441 525 646 572 657 596 556 583 560 550 425 351 6 461

Vladivostok 437 461 535 433 478 341 326 361 487 495 423 383 5 160

Russia only has a large potential for solar photovoltaic (PV), which can take advantage of more widely available diffuse radiation. In contrast, because of its climatic conditions, the country shows only a negligible potential for concentrating solar power which depends on direct normal irradiation.

85 EBRD Renewable Development Initiative, Country profile: Russia: http://www.ebrdrenewables.com/sites/renew/countries/Russia/profile.aspx

57 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Figure 4. Solar power resources of Russia86

86 Joined portal of environmental organizations of Southern Siberia: http://ecoclub.nsu.ru/altenergy/images/karta2.gif

58 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Values of gross, technical, economic and productive potential of solar energy resources of Russia are given in the Table 10. Productive potential is calculated with assumption that in the Russian territories with solar insolation sufficient for their efficient use, about 30% of the country’s population is living. Table 14. Solar energy potential87

№ Parameter Russia

1 Gross potential, bln tonnes of equivalent fuel 2 205.4

Technical potential of:

-heat production, mln tonnes of equivalent 8 753.0 fuel 2 -energy production, mln tonnes of equivalent 922.6 fuel

Total, mln tonnes of equivalent fuel 9 675.6

Economic potential of:

-heat production, mln tonnes of equivalent 2 374.0 fuel 3 -energy production, mln tonnes of equivalent 147.9 fuel

Total, mln tonnes of equivalent fuel 2 521.9

Productive and technological potential of:

-heat production, mln tonnes of equivalent 1 400.0 – 1 700.0 fuel 4 -energy production, mln tonnes of equivalent 620.0 fuel

Total, mln tonnes of equivalent fuel 2 020.0 – 2 320.0

The Russian Ministry of Energy, RusHydro and the Russian Institute of Energy Strategy consider it feasible to situate solar power stations in the Southern and Far East regions of Russia. Regional and municipal governments in the Krasnodar region, Buryatia and Krasnoyarsk region have approved development programs in the solar power sectors and are ready to provide concrete support to the initiators and developers of projects in this area.

87 Nikolaev V.G., Ganaga S.V. et al., Prospects of development of renewable energy sources, 2010, page 45.

59 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

7.2. Current state of the sector and future prospects At present, the solar power sector is immature in Russia, but the government plans to increase the country’s solar capacity up to 150 MW by 202088. In 2010 the large agro-holding Agro-Belogorye launched the first solar power station in Russia. The station is located in the Belgorod Region (Central Federal District). Its total capacity is about 100 kW89. There are plans to build a 12.3 MW solar power station in Kislovodsk (Southern Federal District)90 and another large solar power station in the Chelyabinsk region (Urals Federal District)91. In contrast, the country’s substantial potential for low-enthalpy domestic (and commercial) solar water heating (SWH), which on average can supply hot water above 37 degrees Celsius at least 70% of the year across at least half of Russia’s territory (southern regions and most of Siberia)92, is not being exploited on a measurable scale. This cost-effective use of solar energy, which is competitive with electric and oil-fired water heaters. Similar to the wind power there are many small scales installations, but there is a lack of statistics and centralized gathered data about them. The only available information is provided by companies, that have installed solar units for their internal use. In the second half of 2012 the Russian company Hevel installed two solar power systems at the Anapa Railway Station93 (the Southern Fedferal District) and at the greenhouses of the Monastery of Valaam94 (Northwest Federal District). The peak output of the stations is 70 kW and 60 kW correspondingly. Both stations use a thin-film photovoltaic technology. The Russian solar energy sector is young, so now most of the projects are on the stage of feasibility study and project design. But power generating facilities launched several years ago, e.g. the one at Agro-Belogorye, function according to business plans, which can be regarded as a positive factor for the future of the sector. However, in case the government approves the procedure of selling power to the grid, it is clear that the price of the solar energy will be higher than the one of the traditional energy95.

88 Swiss Business Hub Russia, Renewable Energy, 2012, page 4. 89 News Agency Infox: http://www.infox.ru/science/tech/2010/09/29/Pyervaya_solnyechnay.phtml 90 Same source. 91 Voice of Russia: http://rus.ruvr.ru/2012_08_15/V-Rossii-postrojat-pervuju-krupnuju- solnechnuju-jelektrostanciju/ 92 Fortov, B.E. and Popel, O.C., Renewable Energy in Russia, Plenary lecture at the 2nd International Conference "Renewable Energy: Challenges and Prospects”, Makhachkala, 2010. 93 Hevel Solar’s press-release: http://www.hevelsolar.com/press/news/72.php 94 Hevel Solar’s press-release: http://www.hevelsolar.com/press/news/73.php 95 Russian Information Agency Vesti: http://www.vesti.ru/doc.html?id=515528 and according to an expert on the Russian solar power industry, who preferred to stay anonymous.

60 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

7.3. Bottlenecks along the solar power supply chain Land The access to land plots required for solar power generating installations in many Russian regions is complicated due to restrictive legislation(changing the status of the land plots from agriculture to multi-purpose) and unavailability of large plots of land near the main consumers (e.g. industrial enterprises). According to various estimations, for 1 MW installation approx. 2,5 hectares of land are required in the South Ural region (the calculations were made for the feasibility study of the project to construct a solar power generation station in Tschelyabinsk). Thus for 100 MV 250 hectares would be needed. Manufacturing In Russia there are several companies active in research and development in the field of solar energy. Although the installed solar PV capacity in Russia is small, it is more advanced at the earlier stages of the solar photovoltaic (PV) value chain, especially in the production of the feedstock silicon. Among the Russian manufacturers of products for solar energy generation, there are two companies worth mentioning. One is Nitol Solar, which focuses on the production of polysilicon, the basic feedstock for solar cell production. Another is Hevel Solar, which aims to produce innovative thin-film PV elements. Hevel Solar bought its technology from the Swiss company Oerlikon and is currently constructing a production plant in Novocheboksarsk (the Constituent Republic of Chuvashia, Volga Federal District). Hevel Solar, which is a joint venture between the conglomerate and Rusnano, the state-owned nanotechnology commercialization enterprise, is constructing its first 130 MW (a production volume of more than 1 million modules per year) thin-film solar PV module manufacturing plant in Novocheboksarsk in the Chuvash Republic, 500 km east of Moscow. The plant is currently under construction and should be completed by the end of 2013. Initially, the bulk of its production is dedicated for export. Logistics Russian manufacturers of solar PV panels are mainly located in the Central and Northwest Federal Districts, while the most favorable regions for developing wind energy are the Southern Federal District and Siberia. Though the logistics issue is not as pressing as with the wind power sector, as the main region for developing the solar energy sector is the Southern Federal District, which is close to the Central Federal District and has a good road and railroad network in comparison to Siberia or the Far East. Staff Qualified staff is also a problem for the solar energy sector in Russia, but a minor one.96

96 According to a telephone conversation with Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia.

61 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

Of course, highly-qualified professionals are always wanted, but staff problems in the solar energy sector can be solved quite easily, e.g. by introducing rather short educational courses for engineers97. Disposal and recycling Disposal and recycling were not identified as one of problems of the Russian solar energy sector.

97 According to an expert on the Russian solar power industry, who preferred to stay anonymous.

62 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

8. CHP 8.1. Current state of the sector and future prospects

8.1.1. Sector structure Russia has a long tradition dating back to the Soviet era98 of supplying heat to all sectors through district heating networks linked to power plants. The country has applied this energy supply model throughout the country: 73% of the population (92% of urban and 20% of rural areas) are supplied by district heating99. There are 585 CHP plants in Russia100 which account for approximately 30% of the country’s total generation capacity101. In 2009, CHP capacity supplied 65% of total national electricity and 45% of total heat production102.57% of Russia’s CHP plants capacity is in municipality ownership, while 253 belong to industrial enterprises103. In Russian district heating systems, on average, heat production is 1.5 times greater than electricity production (in primary energy terms). District heating is based on shared heat supply for a larger number of dwellings and industrial consumers, instead of on-site heat generation. In theory, such centralized generation systems can save fuel as a result of the combined heat and power production process, if efficient technologies and operational practices are used. However, Russian heat production installations operate at a level of energy efficiency well below international averages104. In general, the district heating chain consists of three stages: 1. generation (power plants and boiler houses); 2. distribution (pipeline network); 3. consumption (residential sector: houses or apartments). In Russia about half of district heating is served by large-scale CHP plants and the other half by heat-only boiler houses (HOBH). The main fuel is natural gas which satisfies roughly 65% of heat generation. The ownership and management structure of Russia’s heating sector is in flux and local institutional solutions vary widely. Private-sector producers – territorial

98 Boute, A. (2012), “Modernizing the Russian District Heating Sector: Financing Energy Efficiency and Renewable Energy Investments under the New Federal Heat Law”, Pace Environmental Law Review, Vol. 29/3, pp. 746-810. 99 Korppoo A. & N. Korobova (2012), “Modernizing residential heating in Russia: End-use practices, legal developments and future prospects”, Energy Policy, Vol. 42, March 2012, pp. 213-220. 100 Bakhareva A. (2012), Comparison of the CHP sectors in Russia and Western Europe, Frost & Sullivan; available at: http://www.ng.ru/energy/2012-05- 15/15_kogeneraciya.html 101 IEA (2008), CHP/DH Country Profile: Russia, The International CHP/DHC Collaborative 102 IEA (2011), Energy Balances of Non-OECD Countries (2011 Edition), IEA/OECD, Paris. 103 Novoselova O., APBE, Technical Platform “Small distribution energy network”, The perspectives of development of the distribution energy network in Russia; 104 IEA (2011), World Energy Outlook 2011, IEA/OECD, Paris.

63 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation generation companies (TGKs) – typically operate large-scale CHPs. These companies were created during the power-sector reform in the 2000s, and have become an important group of actors in the heating sector. Local industrial enterprises have traditionally provided communities with heat from their facilities, and such systems are still in use in many industrial towns even though the enterprises often make no profit from this activity. Municipal heat generators have the specific task of generating and distributing heat for the population in areas not covered by TGKs or industrial facilities; they typically operate HOBHs or small CHP plants. Traditionally controlled by municipalities or local governments, their operations are now often privatized or leased to private sector heat suppliers. The distribution networks which connect the heat supplier to residential sector consumers are typically controlled by municipalities and operated by a service company that leases the pipelines. With large-scale CHPs, trunk pipelines tend to be controlled by the TGKs. The residential sector accounts for 45% of heat consumption, whereas the industrial sector consumes 38%, commercial and public sectors 15% and agriculture 2%. Total final consumption of heat fell by 47% during 1990–2007. Proportionally, industrial consumption showed the greatest decline, some 54%, during 1993– 2007, whereas combined residential, commercial and public consumption fell by 33%. It is significant to note that the decline in heat consumption continued until 2007, while power consumption started recovering in the late 1990s and regained the pre-transition level in the late 2000s105.

8.1.2. Challenges The declining demand for centrally produced heat is partly due to the poor quality of heat services the aging district heating systems provide: 1. The equipment and technologies used in the Russian CHP sector are critically outdated. The average age of thermal power capacity is 40 years106. 2. The level of investment into new cogeneration technologies is low, technological upgrades and replacement of the equipment are long overdue. The average plant efficiency in Russia is at least 10-20% lower than that of modern plants107. 3. The heating metering systems are only partially in place and the payments of individual consumers are not based on the amount of heat consumed. 4. The heating tariffs are rather high and their growth is being held back by non-economic measures (e.g. political directives).

105 Korppoo A. & N. Korobova (2012), “Modernizing residential heating in Russia: End- use practices, legal developments and future prospects”, Energy Policy, Vol. 42, March 2012, pp. 213-220. 106 Ibid. 107 Ibid.

64 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

8.1.3. Future prospects In recent years the only significant project for constructing a new CHP plant was executed by the Russian natural gas giant Gazprom. In late 2009 it started building an innovative CHP plant in Adler (Southern Federal District)108. In mid- January 2013 the plant was launched at full-scale. There are also plans to construct several more CHP plants. Thus, RusHydro plans start construction of a large CHP plant in Khabarovsk (Far East Federal District) in February–March 2013109. Also there are plans for constructing the first CHP plant in Russia fuelled by the waste products of the wood-processing industry in Kotlas (North East Federal District)110. In 2013, the construction of the second stage of a CHP plant in Blagoveshchensk Region (Far East Federal District) may be started111. The Constituent Republic of Tuva (Siberia Federal District) also plans a large-scale renovation of CHP plants in several of its largest cities in the near future112. Despite the plans to launch new cogeneration facilities, the share of cogeneration in the total energy output is expected to decrease over the next two decades (see figures 5 and 6).

108 Gazprom’s press-release: http://www.gazprom.ru/press/news/2009/september/article68474/ 109 Information Agency Interfax: http://www.interfax- russia.ru/Fareast/main.asp?id=366113 110 Beregovskikh G., Dvinskaya Pravda Newspaper, Thermal power station fuelled with wooden pellets will be built in Kotlas: http://dp29.info/proizvodstvo/600-v-kotlase- postroyat-tes-rabotayuschuyu-na-drevesnyh-othodah.html 111 Information Agency Interfax: http://www.interfax- russia.ru/Fareast/main.asp?id=350972 112 Russian Information Agency RIA-Novosti: http://ria.ru/economy/20130122/919151291.html

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Figure 5. Cogeneration share in total energy supply in 2010113.

2010 Cogeneration share = 37% 0,4% Nuclear power stations 11,1% 20,5% Hydropower stations

21,0% Gas-powered thermal stations Coal-powered thermal 47,2% stations Renewable energy

Figure 6. Projected cogeneration share in total energy supply in 2030114.

2030 Cogeneration share = 32% 2,0% Nuclear power stations 15,6% Hydropower stations 21,2%

Gas-powered thermal 18,1% stations Coal-powered thermal 43,1% stations Renewable energy

113 Novoselova. O.A. (9 October 2012), Global trends in the development of the renewable energy, Presentation by APBE [Russian Energy Forecasting Agency] at “Sustainable Development and Renewable Energy” Summit, Moscow, 9 October 2012. 114 Same source.

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8.2. Potential of CHP in Russia Despite the weak organisation of the Russian CHP sector, especially the district heating network, one of the main targets of the development of the Russian energy sector is the substitution of heat production in boiler houses by cogeneration of electricity and heat. The target for a distant future is the total production of electricity by cogeneration technologies to reach up to 250 bln kW/year115. The drivers of the CHP development are the following: a) Savings of 50 million tonnes of reference fuel per year (around 12 % of the current consumption of fuel); b) Reduction of losses in electricity and heating grid; c) Reduction of tariffs for electricity and heating for the end users; d) Improvement of the quality and reliability of electricity and heating supply to the consumers; improvement of energy security The main objectives of the development of the CHP sector in Russia are: a) Growth of the share of cogeneration in the total heat generation to 70% and to 40% in the total power generation; b) Growth of the share of distribution cogeneration to 30% in the structure of the electricity and heating energy sector in Russia; c) Modernization of the topology of the electric and heating grids, development of distribution networks on municipal level; d) Expansion of usage of renewable energy sources. In order to achieve these objectives the “Small distributed power generation” Technology Platform was created and approved by the Presidential Commission on high technologies and innovations in April 2011. The coordinators of the platform are APBE, Inter RAO, “Russian bio energy society”. Currently, the Technology Platform has 168 member organizations116. The coordinators of the Technology Platform have formulated the main objectives of technology policy in the thermal power sector: 1. Increase the load of existing CHP plants by replacement of boiler houses, construction of new heat networks of CHP plants, development of tri generation. 2. Modernization of existing CHP plants in order to increase the output of electricity production with maintaining the same level of heat production. 3. Modernization of boiler houses using the technologies of small and medium heat cogeneration: a) gas powered electrical generator (up to 100 MW), gas turbine generators on the basis of micro turbines (15 kW to 1-2 MW), low power turbines (2-50 MW), medium power turbines (50-120 MW)

115 ABPE projects the total cogeneration rate in Russia at 250 bln kW/year after upgrading all boiling stations in the country. http://www.kommersant.ru/doc/2129799 116 Presentation of General Director of APBE I.S. Kozhukhovkiy at the international seminar on Development of CHP in Remote Areas, October 2012: www.e- apbe.ru/library/.../RusIsland_infr_development_rus.ppt

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The Master Plan of Power Facilities Positioning until 2030 envisages installation of a total of 3100 MW capacities of distribution cogeneration in the basic scenario and 5896 MW in the maximum scenario117. Small CHP can be used in remote communities with no centralized power networks or unstable energy supply (almost 20 mln people), as well as important transport corridors, bordering regions, perspective region of natural resources extraction, northern territories of Russia. In the future, the client base of small CHP plants will extend to industrial, communal consumers, who have connection with the centralized grid, but will prefer own energy supply based on cogeneration technologies because of higher reliability and economic feasibility. The following segments bear opportunities for the development of CHP: 1. communal district heating: cogeneration installations, adapted for consumer demand 2. industrial clients: optimization of energy supply 3. remote areas and communities: high costs of power generation and difficulty of supplying fuel 4. mobile consumers: transport, construction, geology, tourism, agriculture, emergency services, ..) 5. households, cottages: reserve and additional energy supply Legislation in the area of cogeneration The main legislative document in the area of cogeneration is the Federal Law “On Heat Supply” adopted on 27 July 2010. Interviewed experts point out that it is obligatory to make amendments to the Federal Law and include the definition of a cogeneration power generating installation: “produces heat in the communal sector simultaneously with electricity generation (for own needs, to supply to the wholesale market)”. One of the objectives of the amendments to the legislation is for the new legislation to take into account the specifics of cogeneration on sub-distribution power generating installations for the means of distribution pricing. It is required to systematically harmonize the legislative base and regulatory acts in the field of heat supply (Federal Law 190) and electricity power generation (Federal Law 35), and create a legislative basis for the functioning and development of cogeneration, including in the area of municipal heating supply. The Technology Platform has developed a proposition on measures to stimulate the development of small distributed power generation and cogeneration. The proposed measures include: 1) Priority to commission new generation installations using cogeneration technologies 2) Regulative prohibition on construction (reconstruction) of boiler houses without a feasibility study of installing cogeneration technologies 3) Priority for sales of energy and heat from cogeneration installations;

117 General Director of APBE I.S. Kozhukhovkiy at the I All-Russian Conference on Development of Small CHP in Russia: http://ahconferences.com/conferences/?conf=596

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4) Simplification of the Rules of technical connection to the electricity grid 5) Provision of preferential investment loans for local manufacturers of equipment 6) Provision of state consumption loans for purchasing of locally produced equipment 7) Including the investment component into the tariffs for the whole payback period of the equipment This will require the implementation of a set of legislative measures in various areas, as proposed in Table 15. Table 15. Proposed legislative measures for development of CHP

Area Proposed measures

Grid connection Introduction of a mechanism of partial funding by the consumers of the region of the creation of a grid infrastructure for projects, which are implemented in the framework of the programs of the development of the region (under 50%) Participation of small generation Application of the terms and capacity in the (retail) energy market conditions of sale of capacity, provided for generating installations, commissioned in the framework of contracts for provision of capacity (or tariff support for cogeneration electricity) Pricing of electricity distribution Introduction of a mechanism of payments, which will allow consumers to pay for distribution of energy based on actual usage of the network (payments for reserves of capacity of the electric grid in case of interrupted energy supply from small generation installations) Technical regulation Prohibition of connection of non- efficient high power gas boiler houses (larger than 3 MW) to the district heating, with replacement with efficient cogeneration installations of small capacity Interaction of federal and regional Revision of Master plan with a focus programmes of energy efficiency on development of small generation improvement and with inclusion of small distributed power generation into regional programmes of energy sector development and energy efficiency improvement.

69 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

8.3. Bottlenecks along the CHP sector supply chain Significant barriers and constraints exist for the development of cogeneration in Russia118: 1. Statistical reporting of heat supply suffers from systematic flaws. 2. Unjustified distribution of loads in the district heating systems towards boiler houses and against loading of the thermoelectric power plants leads to the growth of fuel consumption in regions. 3. Lack of connection of the heat supply and electricity markets leads to inefficient regime and burning out of fuels on thermoelectric power plants. 4. The market of electricity capacities created a new category of impelled generators because of inability to replace them on heat supply. 5. The pricing for heat and electricity is not correlated which leads to cross subsidizing. 6. High grid connection tariffs, network tariffs and the requirement to operate on the wholesale market for electricity and power deprive the municipal authorities and consumers of benefiting from using local cogeneration. The main bottleneck for the development of the cogeneration sector is the political factor, stemming from different ownership of the power and heat generation facilities and networks119. Heating companies and electricity producing and distribution companies have a conflict of interests and no willingness to cooperate. This political risk hinders the development of CHP in Russia. Several interviewed experts during interviews have also named corruption as one of the highest risks of the heat generating sector, which attempts to protect its vested interests.

118 According to Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia, and an expert from a stake holder affiliated with the Federal Government, who also performs feasibility studies for state and private projects in the energy sector 119 According to a telephone conversation with Alexey Kokorin, Coordinator of the “Climate and Energy Industry” Program of the WWF Russia.

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9. Opportunities in the Russian renewable energy market The current situation in the Russian renewable energy sector, shaped by the current low importance of renewables on the political agenda, legislative and financial constraints and the lack of effective support mechanisms for the renewable energy industry, does not envisage large scale opportunities on the Russian market for foreign companies and organizations. At the same time niche opportunities exist in some of the sectors. These opportunities are individual projects, initiated and developed based on personal arrangements with regional and municipal authorities or private sector clients. Thus, the existing potential is opportunistic and cannot be systemized and estimated quantitatively. Table 16 Niche opportunities in the wind, solar energy and CHP sectors Niche opportunities within the existing policy and legislative environment Opportunity Description CHP 1. Small and medium Clients: scale CHP  industrial and agricultural enterprises; installations fuelled  remote communities (currently energy needs by biogas and met with diesel generators); biomass residues Regional potential:  southern agricultural regions of Russia (e.g. Belgorod);  northern remote communities; 2. CHP installations for There is significant potential in the improvement of the industrial sector energy efficiency of industrial enterprises in Russia, especially in heavy industries, such as metallurgy, cement, machinery. Optimization of industrial systems may include introduction of technologies of reusing steam and production waste for the means of generating heating and electricity production. 3. Modernization of the Technical upgrade and operational expertise for hardware and modernization and efficiency improvement of existing software of existing CHP plants. Most of the existing CHP plants were medium CHP plants constructed in the Soviet times. The equipment is outdated and requires modernization. Clients:  Industrial enterprises;  Agricultural enterprises. Wind energy sector 1. Ad hoc operational Provision on operational management and consulting expertise services to Russian companies and organizations operating wind energy projects. According to the

71 Lighthouse Russia B.V. Quick Scan of Wind-, Solar Energy and Combined Heat and Power in the Russian Federation

feedback of interviewed experts, existing wind energy installations have not been able to reach the efficiency levels envisaged in the feasibility studies. To a large extent the reason why the installations are not reaching the set capacity is the poor operational management expertise and maintenance and service skills of the Russian operators. 2. Feasibility studies Currently there are several projects in the wind energy sector in Russia in the initiation and preparation stage (incl. the Murmansk wind park project). The expertise of Dutch companies will be required in conducting the feasibility study to determine the operational, economic, technical feasibility of the project.

Solar PV The few ongoing projects in the field of solar energy in Russia are small-scale and not easily replicable. They do not provide opportunities to international suppliers.

If and when the set of measures to stimulate power generation by facilities powered by renewable energy sources currently developed by the Russian government are officially approved and implemented, this will jump-start the development of the Russian wind, solar energy and CHP sector and create new opportunities for foreign suppliers of renewable technologies and expertise. In order to foster the large-scale growth of the wind, solar energy and CHP markets, the legislative framework should be created to support the introduced set of measures (secondary legislation and a set of normative documents and guidelines) and the policy framework on the federal and regional levels needs to be improved. Creation of a legislative and policy framework for power generation powered by renewable energy sources will facilitate the development of financial mechanisms for financing projects in the renewables sector (both as public- private partnerships and private investment). In general, we assume that the improvement of the legislative, policy and financial framework will boost a larger-scale exploitation of the existing opportunities as well as create new opportunities for Dutch companies.

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Table 17 Opportunities in the wind, solar energy and CHP sector following the improvement of the legislative, policy and financial framework Opportunities following the improvement of the legislative, policy and financial framework Opportunity Description Wind energy 1. Expertise in project Russian companies operating projects in the wind development and energy sector lack operational expertise in such areas management as: 1) Project development and planning; 2) Development of the infrastructure; 3) Operational management (especially of remote turbines); 4) Technical maintenance and service of the installations; CHP 1. Medium scale CHP Dutch companies have broad expertise in the installation and development and operation of medium scale CHP operation installations powered by renewable fuels. General opportunities 1. Training of the In the case of the jump start and rapid development Russian specialists of the renewables sector in Russia, there will be a large demand for well-trained Russian professionals. Dutch companies can provide trainings to Russian specialists. 2. Improvement of the Dutch companies have broad expertise in operating transmission transmission networks. Development of the operating transmission network is crucial for the renewable infrastructure energy sector development. (Electro-technical modelling and grid modernisation) 3. Joint venture in R&D Russian scientific institutions have a large R&D and production of potential and technical expertise. Dutch organizations renewable can assist the Russian institutions in the technologies and commercialization of innovative technologies. equipment The improvement of the legislative, policy and financial framework for renewable energy and the removal of the discussed barriers will also create the appropriate fertile ground for comprehensive programmes like RUSTEC (see chapter 4.1.3.1.), which has the potential to become an area of cooperation between Russian and Dutch public and private organizations.

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9.1. Recommendations The above section underscores that while business opportunities in the Russian wind, solar and CHP sectors already exist, they are nonetheless challenging to distinguish clearly, and especially to quantify in terms of possible market size, due to the current unfavorable market conditions and uncertain outlook for future growth. Nonetheless, given the significant potential importance of the Russian market for renewables, with its vast land mass and favorable resources, high energy demand, it is advisable to already begin establishing and expanding business networks among the key stakeholders in preparation for an eventual rapid market take-off. In this context to maximize their credibility and impact, it is important for the representatives of the Dutch renewable energy industry (both the representatives of public institutions and the business sector) to develop a coherent strategy for approaching the Russian stakeholders, presenting a common message and appearance to the Russian counterparts and creating a network of useful contacts on the Russian market for “new” (non-large hydro) renewables. Interaction with Russian stakeholders can open up ad-hoc opportunities for Dutch producers of renewable energy technologies and service providers in the short-term and allow to establish partnerships with Russian counterparts for the mid and long term period in order to secure the participation of Dutch companies in the boom of the Russian renewables sector once the policy and legislative framework is put in place. Once a significant policy decision impacting on renewables, e.g. the package of measures including tariff incentives currently being consulted on by stakeholders, has actually been finalized, adopted and implemented, providing sufficient transparency and predictability to derive for well-founded/reliable market growth forecasts, a deeper investigation of the business prospects will be warranted.

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10. Bibliography 1. Delovoy Peterburg (2012), “Renewables account for only 1% of the total generating capacities in Russia”, available at: http://www.dp.ru/a/2012/06/20/Na_dolju_vozobnovljaemoj_jen/ 2. Federal (2008), Resolution No. 426 “On the Qualification of a Renewable Energy Generating Facility”. 3. Kokorin A. (2012), “Russia will be able to get only 3% of the total power generation from renewables by 2020”, RIA Novosti, available at: http://ria.ru/science/20121122/912203232.html 4. Kulakov A.V. (2011), “Wind power sector in Russia: problems and development prospects”, Energosovet №5 (18), available at: http://www.energosovet.ru/bul_stat.php?idd=213 5. Boute A. (2011), The Modernization of the Russian Electricity Production Sector: Regulatory Risks andIinvestment Protection, PhD thesis at the University of Groningen. 6. Boute A. (2012), “RUSTEC: Greening Europe’s Energy Supply by Developing Russia’s Renewable Energy Potential”, Energy Policy vol. 51, IFC, Moscow. 7. AddCoss (2010), Development of Wind Energy Sector in Russia, available at: http://addcos.com.ua/vetroenergetika/18#more-18 8. Durayeva, Y., “Renewable Energy in Russia”, Electronic Library for Energy Sector “Rosenergoservice”, available at: http://lib.rosenergoservis.ru/2011-07-20-04-56-55.html?start=2 9. Parmukhina Y. (2009), Wind Energy Market, TechArt, available at: http://www.techart.ru/files/publications/%D0%A0%D1%8B%D0%BD%D 0%BE%D0%BA%20%D0%B2%D0%B5%D1%80%D1%82%D0%BE%D1 %8D%D0%BD%D0%B5%D1%80%D0%B3%D0%B5%D1%82%D0%B8% D0%BA%D0%B8.pdf 10. EBRD Renewables, “Russia: country profile”, EBRD Renewable Development Initiative, available at: http://www.ebrdrenewables.com/sites/renew/countries/Russia/profile.asp x 11. Elektrogaz (2012), Presentation “Autonomous power supply using Elektrogaz’s renewable energy generators”, Moscow. 12. Energy sector information website Smart Grid, Russian Fuel and Energy Industry, available at: http://www.smartgrid.ru/smartgrid/news/2012/08/news41/centercolumn/ permanent/SmartgridNewsBrief/SmartgridNewsInnerCollection/0/0/text_fi les/file/spravka_po_tek.pdf 13. EWEA (2013), Eastern Winds – Emerging European wind power markets, available at: http://www.ewea.org/fileadmin/files/library/publications/reports/Eastern_ Winds_emerging_markets.pdf

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