Russia shows limited renewables ambition despite low-cost potential, carbon neutrality pledge

Despite its recent pledge to achieve carbon neutrality by 2060 and great potential for wind and solar power, Russia has yet to put renewables high on its energy agenda when tackling climate change.

Industry experts say the country has so far provided relatively modest financial support for renewable energy projects, in contrast to other major GHG emitters like China and the EU.

According to figures from the Russian Renewable Energy Development Association (RREDA), a Moscow-based industry body, the total installed renewable capacity under CSA RES (Russia's state-sponsored capacity supply agreements for renewable energy sources) amounts to nearly 3.61 GW currently.

This accounts for just 1.4% of the country's capacity mix and 0.5% of its generation mix.

To put Russia, the world's No. 4 GHG emitter, on the trajectory to achieving carbon neutrality after midcentury, RREDA Director Alexey Zhikharev told Net-Zero Business Daily that 100 GW of renewable capacity needs to be installed by 2050.

But that is far above any projected capacity, based on the government's policy announcements.

In 2017, a government order said Russia could develop 11.6 GW of renewable capacity by 2035 when hydropower is not taken into account, which would account for 4.5% of the country's capacity mix and 2% of power generation.

In the Energy Strategy to 2035 adopted in 2020, the Kremlin focused on how to maintain Russia's status as one of the world's largest oil and natural gas exporters and did not establish renewable expansion targets.

In July 2021, Russian President Vladimir Putin signed a climate change bill into law, requiring major emitters to report their emissions from 2023. But provisions to set binding emissions targets and fund decarbonization projects were removed following opposition from the Russian Union of Industrialists and Entrepreneurs, whose members include large fossil fuel producers.

"The heavy reliance of Russia's economy on exports and domestic consumption of fossil fuels creates a political disincentive to transition abruptly away from such consumption," Climate Analytics Energy Policy Analyst Ryan Wilson said.

"In addition, key fossil fuel production companies are run by individuals with strong connections to the Russian government, giving considerable leverage to stymie attempts at minimizing the role of fossil fuels in the Russian economy," he added.

Climate ambition

In the Nationally Determined Contribution submitted to the UN Framework Convention on Climate Change in 2020, Russia established a target of cutting its GHG emissions by 30% relative to 1990 levels by 2030. Many believe this is easily achievable due to the collapse in economic activity in the 1990s, which led to a drop in emissions.

After Putin unveiled the carbon neutrality target for 2060 last October, the government approved a long-term decarbonization strategy with an aim of reducing net GHG emissions by 40% from 2019 levels by 2050.

But the roadmap did not list renewable expansion targets. Instead, the Kremlin suggested its midcentury goal can be reached via measures like energy efficiency, nuclear power expansion, and forest carbon sinks.

The announcement came after the country's environment ministry revised forestry emissions accounting to take emissions from unmanaged forests into consideration in February 2021. The change can greatly increase the amount of negative emissions, but environmental groups—including Climate Action Tracker—said this is in violation of UN carbon accounting guidelines.

"While the decarbonization agenda is getting an increased amount of attention in Russia, Russia is still clearly taking a less aggressive approach to renewables as a key vector in this endeavor," said Anna Galtsova, director with the Russian and Caspian Energy team at IHS Markit.

The government's slow adoption of renewables comes as gas remains a cheaper feedstock for Russia's power sector, according to Galtsova. Moreover, IHS Markit data shows the average carbon intensity of Russian power plants is lower than their counterparts in China, Germany, Japan, and the US, so the Kremlin does not see decarbonizing them as a priority.

In 2020, gas-fired plants held a 47% share of Russia's electricity generation, hydro and nuclear accounted for 20% each, coal and oil for 13% combined, and non-hydro renewables for 0.3%, according to IHS Markit.

Galtsova said the government sees gas "a rather clean fuel" and its central role in the Russian fuel balance will continue. "Gas will continue to gradually displace coal in power generation where it is possible and economically viable to do so," she added.

Renewables program

That said, the government has been sponsoring renewables projects with substantial local content requirements in recent years, aiming to develop Russian manufacturers in what is a growth sector.

Between 2013 and 2020, the Russian Energy Agency (REA) offered long-term contracts to 5.6 GW of new renewables projects under the first CSA RES program, of which 3.6 GW were in wind power, 1.8 GW in solar, and 200 MW small hydroelectric facilities.

Those projects are scheduled to be commissioned between 2014 and 2024. Many of the wind projects are in southern and west-central Russia, while the solar projects are often located in south-central European Russia and southern Siberia.

"For more accelerated development, it is necessary to revise the volume of support measures upwards," Zhikharev said.

Under the second CSA RES program, whose first tender was held last year, the REA plans to allocate 360 billion rubles ($4.58 billion) for up to 6.7 GW of new capacity, consisting of 4.1 GW of wind power, 2.4 GW of solar facilities, and 200 MW of small hydropower. Those projects are slated to come onstream between 2023 and 2035.

A total of 2.63 GW of capacity, composed of 1.85 GW wind and 780 MW solar, was awarded in September, and those have start-up dates between 2023 and 2027.

Vetroparky FVR, a joint venture between Russian nanotechnology firm Rusnano and Finnish energy company Fortum, emerged as the biggest winner, with 1.39 GW of wind projects selected.

The JV partners are controlled by their respective governments. In a note published in December, IHS Markit analysts said the average cost of supply for all bids submitted by Vetroparky amounted to just $31.40/MWh.

"The prices offered … were not only low for Russia but low even by global standards," they said.

The analysts said the competitive bids are likely due to Rusnano's link to the Russian government, which mitigates regulatory risks and underscores state interests' ambition in renewable manufacturing.

"The overall institutional environment naturally, strongly favors state-led incubation of a fledgling market for Russian renewable equipment manufacturers, given the stringent local content provisions," they added.

Stringent criteria

The winners under the second CSA RES program are required to source 80%-90% of the components in their projects locally, compared with 65% in the first program.

In addition, the project developers need to buy those components from Russian manufacturers that export 3%-15% of their output to foreign markets. "What the state is banking on is that in the longer term the onerous local content requirements will drive higher demand that stimulates Russian equipment manufacturers," according to the IHS Markit note.

However, there are concerns among some industry participants that Russia might not be able to develop a local manufacturing sector in time. It is possible that the government will eventually relax the requirements, or that foreign renewable equipment providers will establish manufacturing operations in Russia via JVs with local partners, the analysts said.

Zhikharev is more optimistic relatively about how CSA RES can promote local production. He estimates the first program led to the development of 1.6 GW of production capacity in wind and solar equipment.

"Despite the relatively small volumes of the Russian market, the renewable energy support program made it possible to build a workable, balanced industry," he said.

Hydrogen plan

Russia's renewable expansion is also set to affect its ambitions in hydrogen. In the Hydrogen Concept adopted last August, the government set an official target of grabbing a 20% share of the global hydrogen market.

Russia aims to produce 200,000 metric tons (mt)/year of hydrogen in 2021-2024, up to 12 million mt/year in 2024-2035, and up to 50 million mt/year in 2050. There are plans to establish production clusters in the northwestern, eastern, southern, and Arctic parts of the country to serve different markets.

Analysts expect the production costs for green hydrogen to remain high in Russia due to limited expansion of renewable energy. However, Galtsova said the country can produce blue hydrogen for a cost between $1.14/kg and $1.60/kg, making it one of the most competitive low-carbon hydrogen suppliers globally.

Blue hydrogen is produced from fossil fuels with carbon capture, storage, and utilization (CCUS) technology sequestering the emissions. In addition to being the world's second largest gas producer, Russia, according to Galtsova, has vast CCUS potential in depleted oil and gas fields.

"Oil and gas companies in general are better placed in this regard than any other industrial group to master CCUS, given it is close to their usual business operations," she said. "I think the Russian oil and gas sector will be one of the leaders in this development in the next several decades."

Wilson suggested the challenges for Russian hydrogen producers lie in commercializing CCUS and making sure that their output can meet international criteria.

"If Russia pursues the [CCUS] route to hydrogen production … adequate monitoring of emissions capture and sequestration will be crucial to ensure it meets the definition of low-carbon hydrogen," he said.

Sanctions risks

Separately, there are growing sanctions risks hanging over Russia's renewables development amid heightened geopolitical tensions between the country and the West.

In recent weeks, Russia has reportedly amassed more than 100,000 troops near Ukraine's borders. The US, the UK, and the EU have warned that Russia will face severe sanctions against key sectors of its economy—including banking and energy—in case of an invasion. "If sanctions involve the limitation or prevention of capital inflows to fund new renewable energy projects, this has the potential to severely limit the expansion of Russian renewable energy capacity," Wilson said.

Russia would be keener to promote local manufacturing clusters if there are more sanctions imposed on the country, but the development could be hampered by limited transfers of technologies, according to Galtsova.

"It is likely to be extremely difficult to build an isolated home industry in Russia very quickly," she said. "The actual pace of such development is unlikely to be very fast should more strict technological sanctions be imposed."

Posted 27 January 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability