An extract from The Renewable Energy Law Review, 4th Edition
Distributed and residental renewable energy
Mergers and acquisitions
After years of being considered an 'oil-and-gas country', Russia now has an expanding renewable energy sector following a recent spate of foreign investment and the installation and construction of several renewable energy projects.
The Soviet Union had a track record of developing renewable energy projects, especially large hydropower projects but also wind energy projects. Nevertheless, from 1970, low oil prices led to the complete abandonment of this sector, which was then neglected by Russian politics.
This situation changed only with the adoption of a national strategy for the development of renewable energy in 2009, which became necessary after Russia joined the Paris Climate Agreement and had to meet the obligations in the Agreement to reduce its carbon dioxide emissions.
As regulatory incentives were poor, the sector only started to develop after a serious shift in stimulation measures for the production of renewable energy in 2013, through the introduction of a capacity-based stimulation system and related capacity tenders.
Below we will outline the main principles and conditions of this system, which has been recently extended until 2035.
As of 1 January 2021, hydro, solar and wind power account for 21.47 per cent of the country's total installed power capacity of about 245.31GW. It comprises 20.14 per cent of the total power of 1,047 billion kWh generated in 2020.2
Notably, the above share mainly relates to large hydropower, whereas wind, solar and medium-sized hydro contribute approximately 1 per cent only. However, the target set by the government for these renewable sources is to reach 4.5 per cent by 2024.
The year in review
During the renewable energy capacity tender launched in 2020 under the new regulations of Decree 449, dated 28 May 2013, on the Mechanism for the Promotion of Renewable Energy on the Wholesale Electricity and Capacity Market (Decree 449), the remaining capacities available for tendering until 2024 under the state policy on energy-efficiency improvement (see Section III) were allocated, namely 192.5MW for the wind power industry and 45.6MW for medium-sized hydro sources,3 to be commissioned in 2023–2024.
The long-awaited new regulations regarding the period beyond 2024 were approved in March 2021.4 The volumes of the state support turned out to be less than expected: approximately 350–360 billion roubles (against 400 billion roubles), which would allow the commissioning of new capacities of up to 6–7GW (against 10GW) until 2035. Thus, new regulations have only partially met expectations of investors; whereas, local content and export requirements to manufacturers and suppliers have been tightened.
The main market participants remain the same.
AO VetroOGK, a structure controlled by the State Atomic Energy Corporation (Rosatom), won a 2020 tender for wind power. It is also currently implementing wind power projects awarded previously. The technology for the projects will be provided by Dutch manufacturer Lagerwey.
OOO Fortum Energy, a joint venture between Fortum and Rusnano, previously won tenders for the construction of wind farms with an aggregate capacity of more than 1,820MW. The power generation facilities will be put into operation by 2023. Danish giant Vestas, one of the world's largest producers of wind turbines, will supply the turbines and components for the projects.
PAO Enel Russia, the key Russian company in the Enel Group, will also concentrate on further implementation of projects it was awarded previously. It was earlier announced that one of the technological partners in the projects will be Siemens Gameza, a joint venture between German company Siemens and the Spanish Gameza.
It appears that a standard structure for renewable energy projects has emerged from recent and current tenders, consisting of the creation of joint structures in which Russian state entities team up with foreign strategic investors in the renewable energy sector. The new regulations, combined with localisation requirements stipulated by law, have also initiated the creation of local high-technology production facilities in Russia.
The policy and regulatory frameworki The policy background
In January 2009, the government approved the state policy on energy efficiency improvement (the Policy).5 When adopted, the Policy covered the period until 2020 and provided key directions for the development of renewable energy projects in Russia. Later, the Policy was significantly amended. Through these amendments, the government set out the current legal framework based on the state-supported capacity supply system and extended the effect of the Policy to cover the period until 2024. In October 2020, the existing scheme was further extended, with certain changes, until 2035.
In June 2020, the government approved the new Russian energy strategy for the period until 2035 (the Strategy).6 This document has replaced the previous energy strategy, which was adopted for the period until 2030. The Strategy recognises the gradually increasing share of renewable energy sources in the Russian energy sector. It further encourages export of equipment and services relating to design, construction, operation and maintenance of relevant facilities and voluntary demand on electric power generated by renewable energy facilities. It is also emphasised that one of the tasks of renewable energy is to increase efficiency of energy supply to remote and isolated territories.7
Through these two documents, the government laid a foundation for the further development of the renewable energy sector in Russia, determined its main directions and created a legal framework for further projects. Both documents became a legislative basis for the adoption of more specific regulations, which created the current legal regime for all activities within the sector.
The Policy, as a key source of basic principles, provided the main targets to be reached in the sector. The initial version of the Policy specified that renewable energy in the Russian energy sector should have reached 2.5 per cent by 2020. Amendments introduced in 2015 changed this target: according to the current version of the Policy, Russia aims to meet a 4.5 per cent share of its energy requirements with renewable energy by 2024, although this still does not seem to be achievable. The Ministry of Energy was empowered to allocate the targeted capacity between various renewable energy sources, initially wind, solar (photovoltaic) and medium-sized hydro sources. As from 2017, it also included waste-to-energy renewable energy facilities. This was a new direction for the development of renewable energy projects in Russia and the government determined8 that these waste-burning plants would first be constructed in the regions of Moscow (280MW) and the Republic of Tatarstan (55MW). In 2018, two new Russian regions were added: Krasnodar Krai (55MW) and Stavropol Krai (55MW).9 However, no bids were submitted for these new projects and the 2018 tender for construction of waste-burning plants was not successful. In 2019–2020, there were no tenders announced at all.
Russia's energy policy emphasises the importance of local production development in the renewable energy sector, including export of locally produced generating equipment. Russia has been trying since 2012 to replace imports, particularly of technologically complex products, with locally produced products. The government encourages potential investors to run production of high-tech components for power-generating facilities in Russia to develop competitive local technologies and production in the country (see Section V for a more detailed description of localisation rules).
Renewable energy sources should also play their role in the emerging sector of hydrogen energy. Nevertheless, the 'road map' adopted by the government in October 202010 envisages only gas and nuclear energy for hydrogen production. We may reasonably expect, however, that the respective concept on development of hydrogen energy to be adopted in 2021 will mention 'green' (i.e., produced using renewable energy) hydrogen too.ii The regulatory and consenting frameworkLegal framework and existing regulations
Russian lawmakers began focusing on renewable energy as early as 2007 with the passage of an amendment to the Law on Electricity11 that attempted to connect renewable energy sources into Russia's electricity generation system. Despite this attempt, a renewable energy programme was not successfully implemented until 2011, when further changes to the Law on Electricity created an incentive scheme for investment in this sector. These changes led to the passage of Decree 449 two years later and the renewable energy developments Russia is seeing today. The basis for the current expansion of Russian renewable energy was the passage in 2013 of Decree 449.
Initially, the government proposed to incentivise renewable energy market participants through premium payments. In 2007, amendments to the Law on Electricity introduced a 'premium scheme' as the principal promotion mechanism. This scheme envisaged that a certain premium on the equilibrium energy price in the wholesale electricity and capacity market would be paid to suppliers in renewable energy projects. However, this mechanism did not work in practice because of certain legal and technical issues and because of the potential impact on prices for end customers.
Subsequently, in 2013, the premium scheme was replaced by the 'capacity supply scheme' and the government adopted one of the key regulations establishing the existing state support mechanism for Russian renewable energy projects – Decree 449.
The key idea of the capacity supply scheme consists in switching from a 'premium' component to a consideration payable to the provider of power generation capacity. The consideration is calculated on the basis of the beneficial tariff.
Applying beneficial tariffs set for 15 years allows market players to receive a guaranteed return on an investment made in the construction and operation of a power facility. The tariffs take into account the capital expenditure amount, currency fluctuations and other factors, and provide a 12 to 14 per cent profit margin.12 We describe the structure of the beneficial tariffs in more detail below. However, to apply such a tariff, suppliers have to comply with the Russian localisation requirements and, for tenders to be carried out after 1 January 2021, also export requirements.
Decree 449 deals with solar, wind, medium-sized hydro and waste-burning power sources, and thus does not cover the entire field of renewable energy sources. Renewable capacities supplied must be equal to or exceed 5MW. Decree 449 is also restricted to the central tariff zone and does not apply to 'non-tariff zones' and isolated territories.
The main mechanism under Decree 449 for encouraging the use of renewable energy is the conclusion of long-term energy capacity supply agreements with renewable energy source operators. A potential supplier is granted the right to enter into such agreements through a tender procedure conducted by the Trading System Administrator (ATS). Under such an agreement, a supplier will be obliged to create the renewable energy facility within a certain time frame and to supply capacity into the Russian energy system. The supplier will be entitled to receive remuneration for its capacity and for the energy it supplies based on 15-year set prices.
In particular, the procedure for concluding an agreement on capacity supply includes the following stages. Capacities are offered to potential suppliers once a year in a tender process organised by ATS. Potential suppliers are invited to submit their bids according to the conditions provided for in Decree 449. Together with a technical and commercial description of the project, the bid shall specify financial guarantees for the potential supplier's obligations. After bids are submitted, ATS will select the tender winners and conclude agreements on energy capacity supply with them.
A potential supplier's main obligation under the agreement is to create a renewable energy facility within the agreed parameters for capacity, localisation levels and timings. Agreements will always contain provisions on substantial penalties for delays in capacity supply.
Another central element of any agreement will be the localisation requirements. Decree 449 requires establishing detailed lists of localisation rates for the different elements of renewable energy facilities. In addition, reaching the agreed level of localisation plays an essential role in determining the price for the supplied capacity. If this level is not reached, the price will be significantly lower (for example, for tenders to be carried out after 1 January 2021, 85 per cent lower for solar power sources and 75 per cent lower for wind and medium-sized hydro power sources), which will render the relevant projects economically disadvantageous.
For tenders to be carried out after 1 January 2021, an additional requirement will be applicable to newly commissioned generating facilities – the target value of export of locally produced generating equipment, which will gradually increase, from 2025 to 2035: for wind and solar power – from 5 to 15 per cent and for medium-sized hydro power – from 1 to 2 per cent.
After completing construction of a renewable energy facility, the supplier must apply for recognition of this source as a qualifying generating facility to be able to supply capacity to the market. The qualification process involves both federal authorities (the Ministry of Industry and Trade of the Russian Federation) and the wholesale market organisation (the Market Council).
When the supplier applies to the Ministry of Industry and Trade for determination of a renewable energy facility's degree of localisation and, if applicable, export value, the Ministry will assign this determination to a special commission. Based on the commission's resolution, the Ministry will submit a statement to the Market Council, which will in turn allocate the renewable energy facility to the relevant category of localisation level, depending on the achieved degree of localisation. The corresponding price will be based on the Market Council's qualification.Institutional framework, and regulators and their respective powers
The Russian electricity market is a two-level (wholesale and retail) electricity and capacity market. The retail market involves an end-consumer element, while the wholesale market mostly consists of generation companies, retail companies and large consumers.
The wholesale market commodities are electricity and capacity. Acquisition of capacity by an acquirer means that it has a right to demand from the supplier that electricity of a defined quality be generated by his or her generating equipment. Thus, the sale of capacity is in fact an arrangement for the provision of certain volumes of electric power in the future.
Provision of capacity generated through renewable energy sources is one of the mechanisms used in the wholesale capacity market. As already mentioned above, this mechanism is structured through the capacity supply agreements entered into as a result of the tenders for the selection of investment projects in the respective areas.
The tenders are conducted up to four years in advance for each different type of generating facility, depending on the applicable type of renewable energy source: solar (photovoltaic), wind and water (medium-sized hydro) energy. Since 2017, a similar procedure has applied to waste-burning energy facilities.
A first step for potential participants entering the market would be conformity with the Rules of Wholesale Electricity and Capacity Market Operation established by Decree 1172.13 Participants are required to enter into a wholesale electricity and capacity market accession contract and acquire membership of non-profit partnership association the Market Council. A mandatory form of accession contract is approved by law and cannot be renegotiated or amended by market participants. Once the accession contract is entered into, the market participant is deemed to be involved in the wholesale capacity market.
The following key entities regulate commercial activities within the market:
- a general regulator: a non-profit partnership association, the Market Council;
- a commercial operator of the wholesale market: ATS (as mentioned above); and
- a settlement operator: the JSC Centre of Financial Settlements (CFS).
The Market Council:
- maintains the register of wholesale market participants;
- prepares wholesale market regulations and the standard form wholesale market contracts (including amendments to them);
- provides certain supporting services to market participants; and
- acts as a compliance controlling body and pre-court arbitrator in certain cases.
The Market Council also exercises authority in relation to certain aspects of the use of renewable energy facilities.
ATS is primarily responsible for conducting state tenders and entering into contracts with wholesale market participants.
CFS provides settlement services to all market participants and ensures the effective operation of the complex settlement system in the wholesale capacity market.
The activities of all three entities are regulated and controlled by the government.Typical project steps, regulatory approvals and time frames
Based on what has been discussed above, the typical project steps for potential market participants would be as follows:
- entering into an accession contract and acquiring membership of the Market Council. A Russian legal entity will be required to be established for this purpose;
- participating in a tender. The tender procedure, with its specific formal requirements, will certainly be a challenge. Among others, the drafting of a precise bid corresponding to the technical and commercial requirements is one of the major tasks;
- in the event of winning the tender, a market participant will automatically become a party to the capacity supply agreement entered into with each of the buyers acting on the wholesale capacity market (currently 270 buyers). The form of the agreement is approved by law and cannot be renegotiated by the winner. If the form is amended by the government (which usually occurs several times a year), the amended agreement becomes automatically binding on all market participants;
- building a power generating facility with the technical and production characteristics described in the tender bid and capacity supply agreement;
- going through the qualification procedure and receiving a qualification certificate in respect of the power generating facility from the Ministry of Industry and Trade; and
- putting the power generating facility into operation by the date specified in the applicable capacity supply agreement.
Particular time frames for projects are determined by the deadline indicated in their respective capacity supply agreements. In practice, the deadline is usually from one-and-a-half to four years from the date of the tender. If the deadline is missed, significant penalties will apply to the supplier. These penalties will automatically be discharged from the supplier's account, which is opened in the settlement system by CFS. Subject to the provision by the supplier of additional financial security, the deadline can be postponed, but for not more than 12 months overall.
Given the current covid-19 crisis situation and the related restrictive measures taken by governments all over the world, many suppliers now implementing their projects under capacity supply agreements have been facing a risk of failure to build and commission power generating facilities on schedule. This is mainly because of the temporary lockdown (or slowdown) of component manufacturing plants (both local and abroad) and partial closure of existing transport routes.
Should this prove to be the case, suppliers may currently refer to the provisions of their respective capacity supply agreements as, according to the standard capacity supply agreement, epidemics, quarantine and related restrictive measures can be treated as force majeure. In circumstances such as these, and subject to the supplier's application, the Supervisory Board of the Market Council may grant a grace period during which no penalties for delay in commissioning will apply, subject to consent of relevant buyers. For example, PAO Enel Russia is going to apply to the Market Council for such a grace period because of a delay in commissioning the wind park in the Murmansk region.14 The company earlier applied for the same for its other wind park in the Rostov region and managed to reduce the respective penalties by 28 per cent.15Recent renewable energy project developments
As can be seen from the above, in the Russian wholesale capacity market there is none of the project development typically seen in international energy markets, as the Russian market's activities are strictly regulated by law.
However, potential capacity suppliers do not enter into project tenders alone. The companies combine their efforts and create consortiums involving global Russian participants, foreign investors and local participants responsible for issues that may arise on Russian territory. These structures allow the creation of strong teams that can effectively resolve issues that arise.
Renewable energy project developmenti Project finance transaction structures
Projects are usually financed by foreign investors at the outset. However, as Russian market participants are large reliable companies, they also participate in the financing of projects.
After a tender, the initial investors make efforts to attract borrowed financing, typically using standard project financing such as bank credit facilities.
As mentioned above, pursuant to Decree 449, the main mechanism guaranteeing investors a return on their investment (thus allowing them to repay the borrowed financing) is the application of beneficial tariffs, set for 15 years under the relevant energy capacity supply agreements.
In addition to the incentives provided by Decree 449, suppliers are also entitled to apply for subsidies from the Russian federal budget, provided that they meet certain criteria. These subsidies could include reimbursement of costs for the technological connection of the generating facility to the electrical power networks. Such reimbursement currently amounts to up to 70 per cent of technological connection costs but not more than 15 million roubles per generating facility.ii Power purchase
New incentives are currently being sought to increase competition on the market, in particular by increasing the sales of electricity (capacity) produced using renewable energy sources. At present, grid operators are primarily required to acquire electricity generated by qualified renewable energy facilities on the retail market to compensate for circuit losses.16
Apart from the above preference, power generated by renewable energy facilities is traded on the wholesale and retail markets under the same conditions and prices as power generated by non-renewable energy facilities.iii Non-project finance development
Although the share of project financing in renewable energy projects in Russia is now increasing, most projects are currently implemented through structures or joint ventures established or controlled by state-owned corporations such as Rosatom and Rusnano (see Section II). These corporations can be considered equity investors in their respective projects.
Some relatively minor investors prefer to use their own funds or to attract financing from their parent companies.
Distributed and residential renewable energy
Distributed (on-site) and residential renewable energy is not widespread in Russia and thus it does not play any significant role in the national economy.
In 2019, new legislation was adopted to support micro-scale generation in Russia. It provides that the owners of micro-scale generation facilities (up to 15kW) may sell any excess electric power produced to retail consumers (in this case, suppliers of last resort) and the latter may not refuse to purchase such electric power. In addition, during the period between 1 January 2021 and 1 January 2029, any proceeds from selling electric power generated by micro-scale generation facilities will be exempt from personal income tax. In March 2021, the government approved the rules of technological connection of micro-scale generation facilities to grid and principles of calculation of prices of electric power generated by such facilities.17 It is expected that it will promote development of the application of renewable energy sources in this sphere.
Traditional energy sources such as oil, gas and coal are commonly used to supply power to isolated territories. However, relatively small generating companies, using renewable energy sources, are now emerging in these territories. To support such companies and to encourage the replacement of existing diesel power plants with autonomous hybrid power facilities that partially use renewable energy, the government implemented new rules in 2019. This new regime provides for the conclusion of energy service contracts (ESCs) for a period of 10–15 years under existing legislation on energy saving and energy efficiency. It is envisaged that, under an ESC, an investor that has implemented the use of renewable energy sources will have its investments recovered by the owner of the relevant modernised generating facilities, who will make regular payments to the investor at least during the payback period plus two years. Such payments will be calculated as fuel costs (which usually constitute up to 70 per cent of applicable electricity tariffs) saved through implementing the use of renewable energy sources.
Renewable energy manufacturing
Renewable energy supply chainsi Participation in a tender and localisation requirements
Russian industrial policy has been trying since 2012 to replace imported materials with locally manufactured ones. This policy is generally described by such terms as 'import substitution' and 'localisation'. Since the Law on Russian Industrial Policy No. 488-FZ18 took effect in June 2015, the public procurement rules for many types of goods have changed and a new rule requiring these goods to be made locally in Russia was established.
Russia has chosen a similar path for developing its renewable energy sources: both the distribution of capacity and the level of prices for the supplied capacity depend on the degree of the localisation of the power generating facility, namely:
- within the tender procedure for selecting investment projects involving the construction of power generating facilities using renewable energy sources (tender), the future operator undertakes to generate power using a generating facility whose construction meets a certain rate of localisation. This obligation is one of the most important preconditions for winning a tender; and
- the power generating facility is subject to certification once its construction is completed. During the certification, the competent authorities verify, inter alia, the facility's compliance with the localisation obligations.
To be admitted to a tender, operators have to register as wholesale market participants. The minimum amount of installed capacity by operators who are wholesale market participants is 5MW. Specifically, for operators of hydro energy plants, there is an additional maximum limit of 50MW. The volume of supplied capacity is estimated by each operator before the actual construction of the power generating facility by signing contracts on the design and construction of the corresponding facilities. The estimates are also set out in the capacity supply agreements that are signed with tender winners. A failure to honour these agreements will trigger contractual penalties.
Furthermore, for tenders to be carried out after 1 January 2021, when planning to participate in a tender, operators have to consider the requirements in terms of the ratio between the required annual proceeds from capacity and power sales and planned annual volumes of power generation (efficiency rate of generating facilities), which is one of the tender's criteria. In addition, the target value of export of locally produced generating equipment also has to be observed.
As mentioned above, a certain degree of localisation must be reached to win a tender. Power generating facilities and their components and equipment have to be at least partly manufactured in Russia. Government Decree 42619 defines the components and operations that are used for calculating the degree of localisation and its rate. Non-compliance with these requirements means that an operator can no longer participate in a tender. The declared localisation degree is also based on operators' forecasts, the planned local industrial capacity and their contracts with the suppliers or manufacturers of components and equipment. The localisation requirements are rather high and, at the same time, most components and equipment for power generating facilities are still not manufactured in Russia. Tender winners are therefore usually confronted with the need to produce the components and equipment themselves shortly after concluding a capacity supply agreement. If a tender winner fails to comply with the agreed timelines and the stipulated localisation degree, it may be subject to contractual penalties ranging from 85 to 100 per cent of the contract's total value.
After the construction of a plant, its certification as a power generating facility that uses renewable energy sources is the final step to set the price for capacity. For the purpose of this certification, the operator first has to file an application for the determination of the degree of localisation with the Ministry of Industry and Trade. After receiving this application, the Ministry passes the application on to the Commission overseeing determination of the degree of localisation of the power generating facilities using renewable energy sources. After reviewing the submitted documents, the Commission then makes a decision that is used by the Ministry to determine the localisation degree and to send a copy of its decision to the Market Council. Finally, the Market Council classifies the power generating facility into the relevant category of localisation level, depending on the achieved degree of localisation. The price for the supplied capacity will be determined specifically on the basis of its allocated category.
When establishing whether a certain component is produced in Russia, the general rules for determining the country of origin of goods (as provided by the customs legislation) will apply, unless a component is produced within the special investment contract (SPIC) framework. This exception to the general rule is expressly provided for by law.ii SPICs
Signing a SPIC has proved to be one of the decisive conditions for meeting the localisation requirements, as it enables any operator who has entered into a SPIC to treat imported components as if they had been produced locally in Russia for the purpose of calculating the degree of localisation at the initial stages of the implementation of an investment project.
SPICs were first introduced in the Law on Russian Industrial Policy No. 488-FZ20 and as a result of Government Decree 708,21 which contains, inter alia, a model for SPICs, these contracts eventually became applicable in practice.
The investor's main obligation under the SPIC framework is typically to implement an investment project, in particular, facilitating the production of specific goods, including those hitherto not produced in Russia, using modern technology and with certain minimum volumes of investment and production in accordance with the agreed business and production plans, which are to be incorporated into the SPIC. The competent authorities control the due fulfilment of the investor's obligations under the SPIC. In turn, the investor is granted certain incentives, usually in the form of tax reliefs and stability (grandfathering) clauses and preferences in public procurement, as well as a special regime for determining the degree of localisation. The scope of incentives available under a SPIC is limited to those provided by law.
In 2019, new rules for entering into SPICs (known as SPIC 2.0)22 were adopted. In particular, these new rules made the following provisions:
- SPICs are available only to those investors who intend to introduce modern technologies (as indicated in a list approved by the government);
- a SPIC has to be entered into through a tender process initiated by the public party or the investor itself;
- a SPIC is implicitly a contract between the investor, the Russian Federation, the relevant Russian region and the municipality where the project is intended to be implemented;
- the duration of a SPIC will depend on the volume of investments but will not exceed 20 years;
- the previous minimum investment threshold (750 million roubles) no longer applies;
- one SPIC may only be concluded with one investor and it is no longer possible to add other participants on the investor's side who could also qualify for government support measures (such as co-investors or involved parties);
- the total amount of financial state support under a SPIC may not exceed 50 per cent of the total investment required by the SPIC. If this limit is exceeded, the provision of state support measures to the investor is suspended;
- the main tax benefit for a SPIC participant remains the zero per cent rate of income tax to be paid to the federal budget and the possibility of reducing the tax's regional component also down to zero per cent; and
- SPICs that were concluded under the previous rules remain in force. Such SPICs can be amended or terminated by the parties concerned on the basis of the laws in force at the time of the SPIC's conclusion. However, it is not possible to enter into a new SPIC under the previous regime.
The SPIC 2.0 regime is aimed at increasing the transparency of the procedure and introducing a number of positive aspects to the regulatory framework. Required secondary legislation was adopted in the second half of 2020 only and first tenders were launched in the beginning of 2021. Therefore, first SPICs are expected to be signed under this new regime during 2021.
Furthermore, another federal law23 has been introduced to regulate the conclusion of agreements affording support to investments in the Russian Federation. This law introduces a new type of agreement, the SZPK, on the protection and promotion of investments. Unlike SPICs, SZPKs are to be used not only in production-based industries, but also in other sectors, such as services, intellectual property and infrastructure. The SZPK legislation also provides for a less formal contract conclusion process. The first nine SZPKs were signed in December 2020.24
Similar to SPICs, SZPKs can include a stability clause and provide certain subsidies and tax incentives to the investor. However, the ultimate goals of these two mechanisms are different. SZPKs are mainly intended to support the development of private infrastructure projects whereas SPICs are intended to ensure the implementation of modern technologies in Russia's industrial sectors.
It seems that both mechanisms could be used (and even coexist) in renewable energy manufacturing, depending on the specifics of the particular investment project.
Other key considerations
As mentioned above, the main players of the renewable energy market have not changed since 2017. There is no evidence of any significant M&A deals in this area.
However, upon reduction of the allocated state support under the Policy extended until 2035 (compared to expected volumes), it is forecasted that certain restructurings will follow and, in the worst case, some participants will be even forced to leave the market.
As for the operation and maintenance stage of renewable energy projects, it is common for operators of generating facilities to engage manufacturers of respective equipment for such maintenance works.
Because most of the tendered capacities have been just commissioned or are still under construction, the issues relating to repowering and decommissioning of generating facilities are not on the agenda of operators. At the moment, we do not see any examples or development in this area.
Conclusions and outlook
Implementing incentive mechanisms for the use of renewable energy in the Russian legal system has created significant activity in this sector and renewable energy facilities are constantly under construction. Localisation requirements have brought new production facilities to the country, with suppliers able to produce components for renewable energy locally now being in high demand. We have even seen the first examples of locally produced components being exported.25 With the recently established requirement of the target value of export of locally produced generating equipment, other examples should follow.
Upon extension of the Policy until 2035, we expect further development of the market. Although, because of reduced state support (compared to expected volumes) and increased requirements, competition among market players is rather tough.
On the other side, it may encompass segments that are currently beyond the scope of Decree 449, such as energy supply sectors in isolated territories, micro-generation and voluntary demand on electric power generated by renewable energy facilities. Russian politics are supporting these developments.
In parallel, the Market Council has initiated development of the concept of Russian green certificates, which may be used to supplement the existing structure. Work is being done by the Market Council in this respect; thus, for the first time in Russia, the concept of green certificates seems to be a potentially workable option. By selling these green certificates, consumers could reduce their total amount of payments for capacity under the current support mechanism of capacity supply agreements, while for power suppliers, the green certificates could act as a source of return on their investments.