After years of being considered an “oil and gas country,” Russia now has a renewable energy sector that is expanding after a recent spate of foreign investment, and the installation and construction of several renewable energy projects. According to state policy1, renewable energy in the Russian energy sector should reach 4.5% by 2024.
The basis for the current expansion of Russian renewable energy was the passage in 2013 of Decree 4492, which created the legal framework for establishing renewable energy capacities in the Russian electricity market. But Russian lawmakers began focusing on renewable energy as early as 2007 with the passage of an amendment to the Law on Electricity3, which attempted to connect renewable energy sources into Russia’s electricity-generation system.
Despite this attempt, a renewable energy program 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.
This article describes the legal framework of the Russian renewable energy sector and the main challenges it faces. Although future Law-Now articles will focus on specific topics, the aim of this piece to outline the legal and practical framework for any players who are interested in entering the Russian renewable energy market.
Key elements of Decree 449
Decree 449 deals with solar, wind, moderate-sized hydro, and waste treatment power sources, and thus does not cover the entire field of renewable energy sources. Renewable capacities supplied must be equal to or exceed 5MW. Regionally, Decree 449 is restricted to the central tariff zone, and does not apply to so-called “non-tariff zones” and isolated territories.
The main mechanism under Decree 449 for developing renewable energy is the way it promotes long-term energy capacity supply agreements between renewable-energy source operators and the Russian energy system. A potential supplier is granted the right to enter into such agreements through a tender procedure conducted by the administrator of the trading system (ATS). Under such an agreement, a supplier will be obliged to create the renewable energy source 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 fixed tariffs.
In particular, an agreement on capacity supply will include the following stipulations: capacities are offered to potential suppliers once a year in a tender process organised by the ATS. Potential suppliers are invited to submit their bids according to the specifications of Decree 449. Together with a technical description of the project, the bid shall specify the degree of localisation of the renewable energy source as well as financial guarantees for the potential supplier’s obligations. After the bids are submitted, ATS will select the winners according to the specifications of Decree 449, and conclude agreements on energy capacity supply with them.
The main obligation of a potential supplier under the agreement is creating a renewable energy source within the agreed-upon parameters of capacity, localisation and timing. Agreements will always contain provisions on sensible penalties for delays in capacity supply.
A central element of any agreement will be the localisation requirements. Decree 449 requires detailed lists of localisation percentages for the different elements of the renewable energy source to be developed. In addition, reaching the agreed-upon level of localisation will determine the tariff for supplied energy and capacity. If this level is not reached, the tariff will be significantly lower (35% lower for solar power sources, and 45% for wind, small hydro and waste treatment power sources), which will render the project economically disadvantageous.
After completing construction of the renewable energy source, the supplier must apply for certification in order to be able to supply energy to the market. The process of certification involves both federal authorities (Ministry of Industry and Trade) and the wholesale market organisation (Market Council).
When the supplier applies to the Ministry of Industry and Trade for determining the renewable energy source’s degree of localisation, 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 certify the renewable energy source in one of three categories of localisation: less than 50%, between 50% and 70%, or above 70%. The corresponding tariff will be based on the Market Council’s certification,
In addition to incentives provided by Decree 449, the supplier is also entitled to apply for subsidies from the Russian federal budget, provided that it meets certain criteria. Such subsidies could include reimbursement of costs for the technological connection of the power plant or for the costs of electrical power supply and distribution networks.
Challenges for renewable energy projects
The Russian renewable energy sector is relatively new and largely untested. Given that all the players are confronting new circumstances, working on any renewable project will pose a challenge.
For any potential supplier, the tender procedure with its specific formal requirements will be highly challenging. Drafting a precise bid corresponding with technical requirements is a major task. Adding more complexity to the issue is the fact that most bidders in recent tenders were consortiums between Russian and foreign entities organised in different corporate forms. As for a bid’s content, the bidder will have to coordinate with technology suppliers able to deliver locally produced components.
Most key technologies in the renewable energy sector are currently not produced in Russia. Since importing such components will not be possible due to localisation requirements, these suppliers will be forced to create new production facilities in Russia. By doing this, they will be bound by the often short deadlines for technology, set by the potential energy supplier, who in turn will be bound by short deadlines for providing energy, set by the energy market.
Setting up a high-tech production facility will in many cases necessitate an agreement on investment incentives with local, regional and federal governments, and will require a special investment contract (SPIC). Negotiating a SPIC is highly technical and time-consuming, and should not be underestimated.
Adding further complexity, the participation of a Russian partner in the production is required in most cases, which will entail creating complicated joint-venture structures over lease and construction issues.
Outlook for the Future
A capacity-based incentive system for Russian renewable energy has created significant activity in this sector. Renewable energy projects are being installed or are under construction. Localisation requirements have brought new production facilities to the country. Suppliers able to locally produce components for renewable energy are now in high demand.
We expect the market to further develop and to encompass segments, which are currently out of the scope of Decree 449, such as energy supply sectors in isolated territories. Russian politics are supporting these developments. Today, Russian renewable energy offers more potential and opportunities than ever before.