The concept for developing renewable energy sources in Russia, following Government Decree 4491(on which we previously reported), pays special attention to local production of power generating plants and facilities in the country. The degree of localisation is a decisive precondition for ensuring an economically attractive price for a power generating plant capacity. Therefore, the owner or other lawful holder of a power generating facility, who uses renewable energy sources (the “Operator”),has to make sure that its power generating facility complies with the localisation requirements.
Future Operators, as a rule, generally pass the localisation requirements on to the constructor of the power generating plant and ensure it fulfils the requirements through high contractual penalties. Constructors must then assemble the plant with locally acquired components or, if local componentsare not available on the Russian market, have to establish their production lines in the country. Whenconstructing a local production line, constructors usually try to minimise their risks by signing a special investment contract (“SPIC”).
This article sets out the existing localisation requirements for renewable energy projects in Russia and outlines the general principles applicable when entering into a SPIC.
The Russian industrial policy has been trying since 2012 to replace the imports, particularly of technologically complex products, with locally manufactured ones. This policy is generally described by such terms as “import substitution” and “localisation”. Since the Law on the Russian Industrial PolicyNo. 488-FZ2 took effect in June 2015, the public procurement rules for many types of goods have changed. A new rule requiring such 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 (the “Tender”), the future Operator undertakes to generate power using a generating facility whose construction meets a certain percentage of localisation. This obligation is one of the most important preconditions for winning a Tender.
- The power generating facility is subject to certification once its construction is completed.During the certification, the competent authorities verify, amongst others, the facility’scompliance with the localisation obligations.
To be admitted to a Tender, the Operators need to register as wholesale market participants. The minimum amount of supplied capacity by Operators who are wholesale market participants is 5MW. Specifically, for Operators of hydro energy plants, there is an additional maximum limit of 25MW. 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 the Tenderwinners. A failure to honour these agreements will trigger contractual penalties.
Furthermore, when planning to participate in a Tender, Operators have to consider the requirements in terms of the maximum amount of capital expenditures for the construction of the power generating facility, which is one of the Tender’s criteria. This amount depends on the renewable energy resource and the year of participation in the Tender. For example, the capital expenditures for the construction of solar plants for projects that are selected in 2018 may not exceed RUB 105,262 per KW in 2019, RUB 103,157 per KW in 2020, etc. For wind plants, the upper limit is RUB 109,561 per KW in 2019 and RUB 109,541 per KW in 2020, etc. Finally, the upper limit for small hydro energy plants is RUB 146,000 per KW from 2019 to 2022. Therefore, the companies participating in Tenders only compete on the basis of the amount of capital expenditures that is needed to develop the facility.
As mentioned above, to win a Tender, a certain degree of localisation must be reached. The power generating facility and its components or equipment have to be at least partly manufactured in Russia. Since 2016, 70% of the generating equipment for solar energy plants has to be made in Russia. Wind energy plants have to attain a 55% localisation level in 2018 and from 2019 should reach 65%. For small hydro energy plants, the localisation degree is 65%. Government Decree 4263 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 the Operator’s forecasts, the planned local industrial capacity and the contracts with the suppliers or manufacturers of components and equipment. The localisation requirements are rather high; at the same time, most components and equipment of power generating facilities are still not manufactured in Russia. The Tender winners are, therefore,usually confronted with the need to produce such components and equipment themselves shortly after concluding the capacity supply agreement. If a Tender winner fails to comply with the agreed timelinesand the declared localisation degree, it may be subject to contractual penalties, ranging from 85% to 100% of the contract’s total value.
After the construction of the plant, its certification as a power generating facility, which usesrenewable energy sources, is the final step in order 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 Russian Ministry of Industry and Trade. After receiving this application, the Ministry passes the application on to the Commission overseeing the 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, which is used by the Ministry to determine the localisation degree and sends a copy to the Market Council. Lastly, the Market Councilclassifies the power generating facility into one of three categories, depending on the localisationdegree: less than 50%, between 50% and 70% or above 70%. The price for the supplied capacity will be determined, in particular, based on 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 for by the customs legislation) will apply, unless a component is produced within the SPIC framework. This exception to the general rule is expressly provided for by the law.
Signing a SPIC has proved to be one of the decisive conditions for meeting the localisation requirements since 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 localisation degree at the initial stages of the implementation of an investment project.
The SPICs were first introduced in the Law on the Russian Industrial Policy No. 488-FZ. Thanks to Government Decree 7084 that contains, amongst others, a model for SPIC, SPIC eventually became applicable in practice. SPICs can be entered into either at the federal level or with the participation of regional and local authorities. The administration tends to adhere to the model SPIC agreement. Changes can be negotiated and implemented but in practice, the administration is very reluctant to accept changes to the model agreement.
The investor’s main obligation under a SPIC is typically to establish or modernise the production of specific goods, including those that were hitherto not produced in Russia, with certain minimal volumes of investment and production and in accordance with the agreed business and production plans to be incorporated into the SPIC as exhibits. 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 preferences in public procurement, as well as a special regime for determining the localisation degree. The scope of incentives available under a SPIC is limited to those provided by the law. SPICs are entered into for a period that is equal to the timeframe required to make the project operationally profitable according to the business plan plus five years, but in any case, should not be more than ten years.