Ksenia Leschinskaya, Ernst and Young
December 31, 2013 | 2 Comments
As the renewable energy market shifts and evolves each year, industry experts need to know where the next hot region will be in order to keep up with the changing tides.
Luckily, global consultancy Ernst & Young has released its Country Attractiveness Indices each year since 2003, which gives a numerical ranking to 30 global renewable energy markets by scoring renewable energy investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.
Here is the firm’s assessment of Russia:
Making an entrance. From almost nowhere, a new competitor has entered the global renewables race. But this is no ordinary entrant — this is the largest country in the world, with a population of over 143 million and an energy strategy that, to date, could not have been further from the green agenda. Will Russia become the green giant of tomorrow, or is it just a passing phase?
The goal. The revelations began in May, when the Government announced a target of 6.2 GW of renewables capacity by 2020 (excluding large hydro) as part of its Renewable Energy Source Development Measures package. This is equivalent to around 2.5 percent of total electricity generation, up from the current 0.8 percent. While this announcement represents reduced ambitions relative to a 2009 pledge to generate 4.5 percent of electricity from renewables by 2020, the latest targets are arguably more realistic given installed renewables capacity totaled only 1 GW at the end of 2012, almost all of it small hydro. (It is noted the country also has more than 45 GW of large hydro capacity.)
The strategy. To help achieve this target the Government will provide RUB85 billion (US$2.7 billion) of support in the form of tariffs awarded via competitive auctions. Developers will be offered an investment return of up to 14 percent, with guaranteed payments for 15 years from the start of operations. However, successful projects will also be required to source 50 percent of equipment from local suppliers, rising to 65–70 percent by 2020, in a bid to expand the domestic supply chain.
Under the support mechanism, projects greater than 25 MW will bid competitively for capacity payments in exchange for making their plants available to meet demand during peak times. Projects less than 25 MW will receive fixed tariffs determined by regional authorities, though those with capacity 5 MW–25 MW can also choose either system.
The results. It was with surprising speed that the Government not only approved the legislation announced in May, but also subsequently move to hold its first tenders in September. Solar was undoubtedly the star of the show, attracting almost 1,000 MW of bids for construction in 2014 to 2017 compared with the 710 MW on offer, though only 32 projects totaling 399 MW were actually awarded. Meanwhile, demand for wind wassomewhat subdued, with only seven projects totaling 105 MW selected compared with the 1,100 MW on offer. No bids were received for large-scale hydro.
Solar versus wind. Many commentators are putting the high level of interest in solar down to greater confidence in the sector's ability to meet the stringent local content requirements. Meanwhile, lower production of wind equipment may have reduced interest in the technology, as well as the fact that 15-year capacity payments will be linked to generation during peak demand which could be problematic for intermittent wind generation. Outside of the tender, however, the Russian Association of Wind Power Industry estimated in October last year that approximately 3 GW of wind projects were undergoing feasibility studies during 2012.
Next steps. September’s tender was closed to non-Russian companies, apparently due to a short bidding timeframe and various stringent electricity market requirements, though it’s not clear whether this will be the case for future auctions. The Government has already scheduled the second tender for June 2014, when it is planning to offer 1,645 MW of wind capacity, 496 MW of solar and 415 MW of small hydro capacity, all for construction in the period 2015 to 2018.
Scoping the opportunities. Other announcements this year also support the existence of a burgeoning renewables sector. In August, the Government announced plans to create a renewable energy resource map that will help identify opportunities for development across different technologies. The sector is also planning to create an industry association covering all renewable technologies, as opposed to the current separate sector agencies, in order to create a stronger market presence and increase lobbying power.
The rationale. Despite this, some market commentators still claim that Russia has little economic incentive to diversify the power mix. So what’s really driving ths new clean energy agenda? It may be that Russia is simply following in the footsteps of its Middle East neighbors in trying to free up fossil fuel for export, rather than consuming domestically. There is also potential to build new transmission lines to export renewable energy into Europe to assist Member States in achieving their 2020 targets and beyond.
Homegrown energy. Even within Russia, domestic green energy could generate savings in remote areas reliant on diesel-fueled generation relative to the high cost of transporting it thousands of kilometers from the country's oil refineries. it could also avoid the need to bring new, and often remotely located, oil and gas fields into production, as the traditional resource bases of the Volga-Urals and West Siberian regions approach depletion. In the ‘90s, it was estimated that the renewable energy potential in Russia could provide a third of the country’s vast energy needs.
And even if some of the parties do not find the energy argument itself sufficiently compelling, Russia's committment for modernization and innovation that creates job opportunities, economic growth and new technologies should not be ignored and may be sufficient to influence policy-makers, corporations, investors and the public.
Fighting the battle. But challenges remain. Questions over transparency may hinder growth given the relative infancy of the renewables sector and its reliance on central support, while the slow pace of market liberalization will also need to be addressed to create a more competitive market. The modernization of the Soviet-era power network is also vital given long distances and low voltages. The 2011 World Energy Outlook estimated that Russia will require around US$615 billion of infrastructure investment between 2011 and 2035, representing both opportunities and challenges for the sector.
Vested interests. Perhaps the biggest challenge, however, is the relative lack of competitiveness of renewables in the short term due to subsidized fossil fuel supplies creating artificially low generating costs. This has enabled electricity prices to be maintained well below levels across the rest of Europe. The dominance of the country’s fossil fuel industry and its historic economic importance has also created vested interests, making change difficult without clear government support and a change in cultural mind-set.
From obscurity to opportunity. So does that mean Russia’s green agenda is unlikely to survive another winter? Broader political and structural concerns will not disappear overnight, but the Government does appear committed to creating a competitive and sustainable clean energy market. There is also a strong economic case based on exports, remote energy users and innovation. It remains to be seen whether the proposed targets and support mechanisms will be attractive enough to offset the perceived investment risks. But given the speed with which the Russian renewables market appears to have moved from obscurity to opportunity, anything is possible.
Lead image: Moscow, Russia via Shutterstock