Russia Needs a New Strategy for Its Energy Sector

At present, there is not much to report on energy sector reform in the Russian Federation. It would be useful to understand the reasons for this inaction when action is most needed. A recent paper published by Tatiana Mitrova and Yury Melnikov[1] (2019) on energy transition in Russia provides the necessary insight:

“Russia, ranking fourth in the world in primary energy consumption and carbon dioxide emissions, adheres to the strategy of ‘business as usual’ and relies on fossil fuels. Decarbonization of the energy sector is not yet on the horizon: a skeptical attitude towards the problem of global climate change prevails among stakeholders. GDP energy intensity remains high, supported by relatively low energy prices and the high cost of capital. The share of solar and wind energy in the energy balance is insignificant and is not expected to exceed 1% by 2040. The challenge for Russia in the coming years is to develop a new strategy for the development of its energy sector, which enters a zone of high turbulence—even in the absence of the influence of the climate change agenda—due to increasing global competition, growing technological isolation, and financial constraints.

Russia is quite an important player in the global energy system: with just 3% of the global gross domestic product (GDP) and 2% of the global population, it provides 10% of global primary energy production, 5% of global primary energy consumption, and 16% of international energy trade. Russia is the world’s largest exporter of energy resources (#2 for oil exports, #1 for gas exports, and #3 for coal exports in 2017, according to BP and the International Energy Agency [IEA]. It ranks fourth in the world—after China, the USA, and India—in primary energy consumption, production of electricity, and carbon dioxide emissions due to the utilization of oil, gas, and coal for combustion-related activities. Given this significant input, Russia’s strategic behavior regarding the energy transition is important not only for the country itself but also for the rest of the world.

From a macro-economic perspective:

For Russia, as for many other resource-rich and energy-exporting countries, the energy transition creates new long-term challenges, questioning the sustainability of the entire economy, which is highly dependent on hydrocarbon export revenues. In 2017, hydrocarbons provided 25% of GDP and 39% of the country’s federal budget revenues, 65% of foreign earnings from exports, and almost a quarter of overall investments in the national economy. Globally rising renewables targets and the transition towards a decarbonization paradigm are regarded in Russia as a significant threat to hydrocarbon export revenues, and thus to Russian economic security.

From the perspective of Russia’s institutional design of the energy sector: Despite the many market reforms in the 1990s, the institutional framework of the Russian energy sector today is still characterized by high corporate concentration and a lack of market mechanisms. Decentralization as a concept faces strong resistance from both the authorities and major business stakeholders. It is quite frequently regarded as a threat to the stability and reliability of the national energy system, and to national security. Three decades after a command economy under the Soviet Union, low prices for energy in Russia are still regarded as a ‘public good’, and any attempt to increase them sparks strong protests from consumers. The rather cheap energy does not create incentives for energy efficiency improvements, or for the modernization of existing assets with high specific fuel consumption.

From the perspective of Russia’s climate policy:

Despite this global trend towards reducing the carbon footprint in the energy sector and introducing mechanisms to stimulate this process (such as carbon taxes or emissions trading systems), the climate agenda and the drive for decarbonization are not yet essential factors in the energy strategy of the Russian Federation. The Paris Agreement, for example, is mentioned only once in the draft version of the ‘Russian Energy Strategy Up to 2035’, a key document defining the country’s strategic priorities in this critically important industry, which was submitted to the government by the Energy Ministry in 2015 but not approved until now.

There are three main reasons for this: 1) Climate change skepticism being prevalent among stakeholders; 2) Russia de facto sharply reducing GHG emissions following the economic downturn and economic restructuring in the 1990s and 3) as of 2017, the Russian electricity sector having a lower carbon footprint (in terms of g CO2 per kWh) than, for example, Poland, Germany, Australia, China, India, Kazakhstan, the Arab countries of the Persian Gulf, the USA, Chile and South Africa. Around 35% of electricity is generated at carbon-free nuclear power plants and large hydropower plants, and 48% comes from gas, with gas gradually displacing petroleum products and coal in the fossil-fueled power plant fuel mix. In addition, Russia faces the threat of market barriers for its exports of energy-intensive goods. Therefore, incentives to set ambitious national decarbonization targets are very low, especially assuming that these additional efforts would require significant investments, which are not available in light of the economic stagnation and financial sanctions, and would also require higher prices for energy, which is socially unacceptable.

From the perspective of technology policy:

Energy transition technologies are definitely not the main focus of Russian technology policy. In the key state document defining priorities in this area—the state program “Energy Development” approved in 2014 and amended in 2019—only “promotion of innovative and digital development of the fuel and energy complex” is mentioned as a target, together with all the new technologies in hydrocarbon production and processing; nothing at all is said concerning low-carbon technologies”.

The researchers do point to a few – though mostly insignificant – movements in terms of policy change:

GDP energy intensity in Russia in 2017 was just 10% lower than in 200. At the same time, the initial energy efficiency target set in 2008 was a 40% decline in GDP energy intensity by 2020. Substantial federal budget subsidies were allocated, but a very limited change occurred, and as a result, the initial target was scaled back significantly, to 9.41%, and federal funding was discontinued.
According to the draft Energy Strategy of Russia for the period up to 2035, the renewable energy share of Russia’s total primary energy consumption should increase from 3.2 to 4.9% by 2035. This includes Russia’s approved plan to expand its total solar photovoltaics (PV), onshore wind, and geothermal capacity to 5.9 GW by the end of 2024. The foundation for the growth of renewables in Russia is Decree 449, passed in 2013, which created a legal framework establishing a renewable energy capacity system for the country. Since then, annual renewable capacity additions rose from 57 MW in 2015 to 376 MW in 2018 (320 MW solar, 56 MW wind).

As technology policy is the main driver of Russia’s interest in renewables, the country is focused first of all on building its own renewables manufacturing capacity. Russia has set a fairly high level of local content required to qualify for the highest tariff rates, an essential component of the long-term feasibility of many Russian renewables projects. The percentage of Russian-made equipment required to avoid tariff penalties was relatively modest in the early days of the auction system, but has now risen to 65% for wind farms and small hydro and 70% for solar until 2020, with the long-term target of localization set by the government at 80%. These high levels have been behind several tenders, especially in wind farm development, for which there has been little to no Russian-made equipment. The requirements have encouraged foreign firms to partner with Russian power companies and manufacturers.

Greenpeace Russia’s Vladimir Chuprov has also written about heavily direct subsidies from the government to fossil fuels, which is the opposite of the direction in which the government should be heading as there is virtually no more doubt of the anthropogenic causes of climate change. Direct subsidies include direct transfers of funds, cross-subsidization, tax benefits, while hidden subsidies are indirect measures that create preferences for the consumption or production of energy, such as low environmental and social standards for the extraction and transportation of fossil fuels, lack of state supervision over the implementation of existing environmental and social legislation requirements.

A positive trend in overcoming subsidies for fossil fuels is the approach proclaimed by the country’s leadership to introduce higher prices for those who use more electricity than what it would have considered the norm (while protecting vulnerable groups from this, i.e. those that live in very harsh climates of the Arctic and the Far East, so they need more energy to stay warm in winters). Right now, electricity is very cheap in Russia and people don’t really stop to think how much they use so that was the government’s attempt to make those who use more than the norm pay more.

Indeed, such steps seem minuscule when, at the same time, the adopted Strategy for the Development of the Mineral Resources Base of the Russian Federation until 2035 (approved by Decree of the Government of the Russian Federation dated December 22, 2018 No. 2914-r) aims to discover new deposits of fossil fuels using various mechanisms of state and private financing, special tax, and regulatory regimes. Additionally, on January 30, 2020, the Cabinet of Ministers approved a package of bills that would provide incentives for investors planning to implement new oil production projects in the Arctic territories. For a number of such projects, as part of the tax on additional income, zero MET will be established during the first 12 years. As a result, three new large oil fields will be launched with investments of about 10 trillion rubles ($153bln). This is supported at the highest level, i.e. by the President of Russia Vladimir Putin.

The main barrier to the implementation of SDG-12c regarding the rejection of inefficient subsidies at the energy consumption stage, according to Vladimir Chuprov, is the underestimation by the country’s leadership of the importance of reducing the energy intensity of the economy and the introduction of energy-saving low-carbon technologies. The country’s leadership sees the main task as maintaining the lowest possible energy tariffs for as long as possible, including by reducing the technological security of the energy infrastructure in the absence of an effective system to stimulate modernization through the introduction of energy-saving technologies.

As for renewables, Mitrova and Melnikov believe “in order to create incentives for renewables, the Russian government should first determine the long-term role of renewables in its energy balance, which is quite difficult to do without a decarbonization agenda. As the country with the world’s largest natural gas reserves and the second-largest reserves of thermal coal, Russia does not see real value in a transition from fossil fuels to zero-carbon energy sources. Despite the country’s massive potential in wind and solar resources and the virtually limitless land available for development, the availability of oil, gas, and coal is suppressing the development of clean energy.”

Activity Rating: * Falling Behind

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It is deeply regrettable that at a time when most of the world’s leading economies, though far from perfect, are at least contemplating necessary reforms in the energy sector to combat climate change, Russia is falling behind and even approving new subsidies for oil projects in the Arctic, one of the most vulnerable regions on Earth. Though initial steps to reject inefficient subsidies at the stage of energy production and hints of a growing interest in renewables are certainly welcome, this all needs to happen at a much faster rate, while at the same time taking what might at first seem like unpopular measures to curb energy consumption and address inefficiency in the energy sector. A long term vision is what needs to start driving policy.

Contact:

Alexander Novak, Minister of Energy of the Russian Federation.

42 Schepkina st.

107996, Moscow, Russia

+7 495 631 8746, +7 495 631 8747

Send a message via this online form: https://minenergo.gov.ru/contacts/reception/order/feedback

This Post was submitted by Climate Scorecard Russia Country Manager Maria Stambler