Russia has the potential to increase its use of all types of renewable energy. Historically, it has a well-developed hydropower sector. Its bioenergy potential is also significant since this technology is used in agriculture, forestry, infrastructure and trade. But today, Russian renewable energy policy is focusing on accelerating the deployment of wind and solar photovoltaic.
Apart from the focus on wind and solar, however, Russia introduced a set of legislative amendments in 2017 aimed at extending the existing renewable energy scheme to include facilities in certain regions operating on the basis of production and consumer waste usage.
The first tenders were carried out in 2017, and development in this sector is expected to accelerate in the coming years.
Generally, a number of factors explain Russia’s increased focus on renewables and decentralised energy. New energy solutions are seen as a way to modernise the power system, but they are also part of a broader socio-economic movement to achieve higher living standards. Also, decentralised electricity generation is of interest to Russia’s remote and distant regions since it is economically impractical to extend high-voltage electricity lines to these areas.
Decentralised electricity generation is also attractive to industry, offering opportunities for them to become more independent from the centralised power system. The relatively high cost of electricity is another reason to explore new energy solutions.
Finally, in response to EU and US sanctions, Russia’s local content requirements have become a mainstay of its economic policy, which is driving inbound investments and technological innovation, particularly in the renewable energy business.
Market entry strategy
All renewable energy projects in Russia are being implemented within the framework set out by the Russian state development programme (the “Programme”). A favourable legal regime (i.e. a guaranteed tariff) applies to projects involving wind, solar photovoltaic or hydro (with aggregated capacity of less than 25MW) renewable energy sources.
The projects are awarded at an annual public tender carried out by the official commercial operator, and winners enter into a Capacity Supply Agreement (“CSA”). Under the CSA, each winner is:
- awarded a 15-year capacity supply arrangement with fixed returns on investment; and
- obliged to build and commission the relevant photovoltaic or wind power plant by a specific deadline.
Failure to meet the deadline leads to significant fines.
The Programme covers the period up to and including 2024. After 2024, the Russian government will continue to support the market, but it is not clear what form (i.e. either legal or financial) this support will take.
In terms of market entry, current rules provide for several possible investment strategies, which include:
- “greenfield” projects developed from scratch through direct participation in the annual public tender mentioned above;
- “quasi greenfield” projects by partnering with companies that have won tenders and have already been awarded a CSA and first stage documents, such as construction licence and permits; or
- “brownfield” projects by partnering with companies that won tenders and have already started implementing their projects, or have fully or partially completed them.
Greenfield and quasi-greenfield projects are particularly relevant for investors who intend to use their own technology, equipment or products. It should be noted, however, that tenders are often won by Russian companies, which are either participating with state-owned conglomerates or groups of companies owned by Russian oligarchs.
Moreover, from a technical standpoint, the Russian renewable energy sector is relatively new, which may make it challenging for foreign investors to work alone on projects.
Thus local partners may be essential in this sector.
Potential investors will have to draft a precise bid at the tender stage, which may include technical requirements. The winner will have to document its rights to the land where the project will be developed, organise the construction and installation process, and coordinate with suppliers to deliver components.
As mentioned above, due to localisation requirements, investors may have to set up production in Russia, a potentially complex and time consuming process with numerous formalities and procedures to be followed.
Crucially, investors will be bound by the deadlines set out in the CSA.
In practice, foreign investors usually enter the market in consortiums with local partners responsible for construction and dealing with local authorities, which allows investors to overcome many of the challenges of doing business in this market.
In the end, choosing a local partner depends on the role foreign investors are ready to play in their projects. An investor reluctant to participate in public tenders should seek a local partner who has already been awarded a CSA, but is struggling to get its project off the ground.
Timing of investment
According to the commercial operator, since the start of 2018 approximately 78% of the targeted capacity covered by the Programme has already been awarded. If state tenders are successfully carried out into 2019, 95% of capacity will be distributed, and opportunities to enter the market through a public tender will become limited and uncertain.
Also, renewable energy development in Russia has become a government priority, which is politically driven to a certain extent.
Leading Russian conglomerates owned by the Russian state or oligarchs close to it have already captured a major part of the market, and drive most of the larger projects. These conglomerates have already attracted foreign suppliers and investors to procure advanced technology for these projects.
Russian “local content” requirements are also high (70% for photovoltaic projects, 65% for wind), and are expected to remain at these levels for the coming years, which requires investors to set up production facilities in Russia.
Basing facilities in Russia could impact investment and business strategies in two ways.
Firstly, once the production facilities for key Russian players start operating in Russia, the need for foreign technology might decrease on the domestic market, making it more challenging to receive pay back depending on the timing, market, and type and nature of the investment.
At the same time, due to contractual limitations, such as patent protection, the R&D technologies transferred by foreign investors to Russian partners will not automatically be available in future projects where the foreign investors are not involved, which could provide foreign investors with a bargaining position.
Secondly, when considering whether to develop a project in Russia, an investor may search for new markets. This is primarily because there might not be sufficient demand in Russia for renewable energy, making it necessary for investors to find foreign export markets to improve returns.
Investors may also try to negotiate an increase in the percentage of renewable energy purchased by state suppliers, or increase rates to offset the cost of localisation. But passing costs on to consumers may raise political concerns and so reduce the chances of positive outcome of such negotiations.
The industrial policy for renewable energy in Russia may well evolve in the coming years into a more balanced model, based on the growth of exports coupled with a decrease in localisation requirements, and without the support of direct public subsidies.
And given Russia’s growing commitment to renewable energy this future may not be too far off.