Russia decided to inject EUR 5.65 billion in renewable energy

By Swann Bigot, legal expert and consultant in international affairs, for Eurasia Network – September 30, 2019

The House of the government of the Russian Federation, Moscow.

Photo credit : Swann Bigot

After one year and a half of negotiations with the national energy industry, the Russian government has approved the support quotas for renewable energy in the period 2025–2035.

Solar power generation, whose companies insisted on increasing their quota, will receive 37% of the total support while the share of wind energy will decrease to 55.5%. Financing of small hydropower plants will remain unchanged – 7.5% of the total funding.

During a meeting held on September 3 and headed by the Deputy Prime Minister Dmitry Kozak, the decision was made that up to RUB 222 billion (EUR 3.14 billion) will be allocated for the construction of wind power plants, RUB 148 billion (EUR 2.09 billion) for solar power plants and up to RUB 30 billion (EUR 424 million) for small hydropower plants.

After a pause due to the selection of projects for the modernization of old thermal power plants, the federal government resumed in July the discussions on the extension of the support scheme of renewable after 2024.

During the negotiations, the Market Council, the national regulator of the electricity market, proposed to reduce the load on the market through tax and credit incentives.

The federal ministry of Industry and Trade had its own ideas, such as reinforcing the localization requirement of equipment used in projects and increasing the exports to foreign markets.

The federal ministry of Economy proposed to support a new program of contracts for the supply of capacity (DPM) for renewable energy in the amount of at least 10 GW by 2035.

However, this allocation of support quotas decided on September 3 may still change. Indeed, a quorum of representatives of the wind and solar generation sectors had to be reached before September 16, the day of voting on this scheme of distribution of support quotas in the Association for the Development of Renewable Energy (RREDA).

The Association was founded in December 2018 and is headed by Anatoly Chubais, who has previously voiced the need to continue supporting the renewable energy industry. The Chairman of Rusnano said that by 2024, when the current support scheme ends, the renewable energy technologies would not yet be mature enough for “the cost competition with traditional power generation” in the Russian Federation and equipment will not be able to compete in foreign markets.

Thus, the total investment resource for supporting renewable energy after 2024 and until 2035, as expected, will amount to RUB 400 billion (EUR 5.65 billion). Payments of the energy market, taking into account the return on investment (until 2050), will amount to RUB 725 billion (EUR 10.24 billion). These funds have been calculated after the approval of the financial scheme of the DPM program of modernization of old thermal power plants.

This amount of EUR 5.65 billion will mainly rely on subsidies and payments from the wholesale market of electricity and capacity.

It would be possible to build with these funds about 3 GW of wind farms, 2.2 GW of solar power plants and 170 MW of small hydropower plants, which is roughly similar to the volume of the current program (2013-2024) but is 30% cheaper, thanks to the decrease of technology costs and the development of the market. If investors find additional funds and sources of return on investment or increase the efficiency of the electricity generation, they will be able to build more capacities.

In April 2019, the federal ministry of Energy calculated that up to RUB 405 billion (EUR 5.72 billion) could be allocated to support the construction of renewable energy capacities after 2024 (the deadline of the first DPM program for renewable energy).

During a meeting with the Deputy Prime Minister last July, representatives of the renewable energy industry would have proposed to support the construction of 10 GW of new capacities, which, according to their estimates, would cost RUB 600 billion (EUR 8.48 billion) until 2035, reported the daily Kommersant.

The federal ministry of Industry and Trade supported in July this proposed extension of the support scheme in this amount of 10 GW of new capacities, but wanted the increase of the localization level to 100% for solar power equipment and up to 90% for wind power equipment.

According to the ministry, investors in renewable energy should supply at least 10% of annual output for export, with growth up to 30% by 2035.

For several years the Russian wholesale energy market has stimulated the development of renewable energy generation through the DPM system : the capital expenditures (CAPEX) have been reimbursed to investors through increased consumer payments over the course of 15 years. The competitive selection of projects under this DPM system has been ongoing since 2013. The last tender took place in June 2019 and covered around 314 MW of capacities. Now the market players insist on building at least 10 GW of capacity under the previous regime : DPM system and 12% annual return on investment.

The renewable energy capacities are now built under capacity supply agreements (DPM) with a guaranteed annual return of 12% for investors. Under this program, by 2024, about 5.5 GW of renewable energy capacity should be built in Russia.

The financial support of renewable energy sources at the expense of the wholesale electricity market after 2024 is criticized by consumers. A representative of the Community of Energy Consumers, an NGO founded in September 2008, said that there is no rational goal for the national economy to continue subsidizing renewable energy sources : “The costs are enormous, the price of 1 kW is much higher than world average and the production volumes are low, the export potential is close to zero.”

In spite of such critics, Russia still has a huge potential in renewable energy capacities. The country has large available lands, regions with good wind and solar exposure, a developed power network, industrial assets in the energy and machine-building sectors, a skilled workforce and strong energy needs. These characteristics empower the growth of the Russian renewable energy industry.

In October 2018, the federal ministry of Energy confirmed the growth of the renewable energy capacities in 2019 and commented :

“[…] the global installed capacity of renewable energy plants in Russia will grow up to about 7.5 GW by 2024. We will reach this target, taking into account the additional generation facilities built in isolated regions and entering the electricity retail market.”

The Russian government started to hold annual tenders in 2013 to select investments projects for the development and the construction of new renewable energy infrastructure. An official target of 4.5% of renewable energy in the national mix by 2024 was adopted. This represents 5.4 GW of renewable energy capacities by 2024.

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