Having one of the richest conventional energy reserves in the world, Russia has traditionally downplayed the importance of renewable power generation. Therefore, it is not surprising that compared to other countries' policy targets around the globe, Russia's goal for electricity generation from renewable sources is starkly diminutive. In 2009 the government set its sights on achieving 4.5% of power generation from renewable sources by 2020, but statements from officials over the past year indicate that, at most, Moscow is now only aiming for 2.5%. By comparison, fellow energy-rich Norway plans to boost wind power capacity alone by up to two gigawatts and Germany is aiming to produce 35% of its power from renewable sources by 2020. Even the European-laggard United Kingdom plans to hit the 15% mark by 2020. In this context, it is worth noting that Russia obtains a significant portion of its electricity from large-scale hydropower, which Russian policy makers do not consider a renewable energy source for the purpose of calculating Russia's renewable energy targets.
Nevertheless Russia has introduced legislation supporting renewable power generation. In 2013 Russia introduced regulations allowing renewable generators to bid, through an auction process, for the opportunity to enter into long-term contracts for the sale and purchase of capacity. The second such auction has just taken place and on 11 June 2014 Russia's Trading System Administrator announced its selection of companies to sign favorable capacity supply contracts on projects totaling 575 megawatts (MW) of installed capacity. That, in theory, ought to give some hope that the country has finally got a workable incentive scheme in place. The first attempt to promote investment in renewables (based on a feed-in-tariff model) never got off the ground, hounded by alleged legal and technical issues as well as concerns about the effect it would have on consumer prices. This time around, Moscow is looking to spur on the development of renewable energy projects through renewable energy capacity auctions.
In essence, capacity markets allow project developers and owners to trade the ability to generate power as a separate commodity to the power itself (the idea being that the committed capacity helps to 'keep the lights on' during times of peak demand and thereby mitigates 'security of supply' concerns that might otherwise hinder greater reliance on renewable energy). Supporters argue capacity auctions encourage investment in new generating capacity by providing a guaranteed financial return on investment and thereby enhancing projects' 'bankability'. Critics argue that capacity auctions incentivise inefficient investment because projects are developed primarily to cash-in on capacity payments and may not meaningfully generate power (albeit that developers naturally have an incentive to maximise investment return by doing both).
In Russia, capacity is traded on the basis of long-term capacity supply contracts concluded at competitive prices. The competitive auctions for renewable energy are slated to take place once a year and consist of two stages. In the first stage, all projects that meet the basic requirements are selected to go on to the second stage. In the second stage, if the total capacity of all the proposed projects does not reach the maximum capacity on offer for that particular auction, then all projects get the go-ahead. If the total proposed capacity exceeds the set amount, then they are selected according to the lowest planned capital costs, until that set amount is reached. Planned capital expenditure is the only factor used in the selection of projects in the second round.
Those selected in the renewable energy capacity auction are awarded the right to sign capacity supply agreements guaranteeing a set monthly payment and promising a minimum return on investment. To ensure profitability, capacity prices are determined by a multi-step process that takes into account the revenues required to recoup operating and capital costs, as well as the amount of electricity expected to be sold on the market. There are minimum electricity supply requirements that, if not met over each year of operation, trigger reductions in the capacity remuneration for generators in the following year. Generators need to deliver 14 percent of installed capacity for solar projects, 27 percent for wind projects and 38 percent for hydropower projects.
In order to make this new system work, the rules of the wholesale power market had to be amended to account for the intermittent nature of renewable energy sources. Thus, by way of Addendum 5, section 12(g) to Decree No. 449, renewable energy producers have been exempted from harsh penalties connected with failing to have the prescribed amount of capacity available when the grid system operator needs it. Instead, selected projects are required to interrupt or curtail their supply of power when demanded by the system operator. As an additional incentive, renewable energy generators can sign capacity supply agreements (and thus benefit from regulated prices) for 15 years, rather than the capacity supply agreements of ten years duration available to thermal power plants.
With 505 MW of capacity getting the go-ahead, solar projects account for the lion's share of the projects, totaling 575 MW, recently allocated the right to enter into capacity supply agreements. Of that, Solar Systems, a unit of China's Amur Sirius, came away as the biggest winner, with solar projects totaling 175 MW getting the nod. Not far behind was Avelar Solar Technology, with 155 MW worth of approved bids.
The remaining 70 MW of capacity is split between wind and small-scale hydro power projects, and this is where the capacity auction scheme might be running into trouble. While 1.6 gigawatts of wind-generated capacity and 415 MW of hydropower were up for grabs, there were only one 51 MW wind project and three hydropower projects proposed. All four projects were selected, but their combined capacity totals only 3.5% of the capacity on offer. It's impossible to know exactly why wind and hydropower developers chose not to bid, but it's likely that onerous local content requirements are to blame for the depressed interest. To comply with regulations governing the incentive scheme, wind, solar and hydropower projects coming online in 2015 must be able to source 55, 50 and 20% of production equipment from Russian manufacturers, respectively. The following year, those figures jump to 65, 70 and 45%. There have been rumblings in the press that it may not be economically feasible to reach those targets, and in the case of wind projects, it may not be possible at all. Solar projects appear to have an easier time meeting the local content demands, one reason being that Rusnano (a giant state-controlled company that has invested billions of dollars to promote hi-tech development) has teamed up with billionaire Viktor Vekselberg's Renova Group to build a new solar panel production plant in Russia's Chuvash Republic.
Perhaps even more troubling for the future of the incentive scheme is the fact that the local content requirements likely run afoul of WTO requirements. While that is likely not a concern for the individual bidders, it could ultimately pose a threat to the whole system. Given the government's desire to diversify and grow its economy, the local content demand was the authorities' way of getting something in return for subsidizing renewable energy development. Without that sweetener, the government may not be so keen to stomach the costs of the program.
One final wrinkle in Russia's alternative energy story concerns Crimea, the Black Sea peninsula recently annexed by Moscow. The small republic already has around 330 MW of solar and wind capacity in place, but operations have been halted in the aftermath of the controversial secession and annexation. While the peninsula was a part of Ukraine, solar producers received a special tariff of around 0.34 euro per kilowatt hour in 2013. Russia's Ministry of Energy has estimated that it would cost around US $400 million per year to offer the same deal to Crimea's renewable energy producers. Doing so would also require further amendments to Russia's Federal Electricity Law. Despite such potential obstacles, investors are reportedly eyeing the region as one of the most favorable places to set up renewable energy projects.
Whether the new regulations will help Russia meet its modest renewable target remains to be seen. The regulatory framework in place appears to be working (at least for solar), but stringent local content requirements are likely pushing costs up and dampening investor interest. Then there's the further worry that those sourcing requirements are contrary to WTO laws.