Keywords

1 Introduction

Russia ranks fourth in the world for primary energy consumption and carbon dioxide emissions and maintains its focus on fossil fuels despite enormous renewables potential. Russia is following a “business as usual” strategy, relying on conventional fuels exports which are critical for the state budget, for the key energy companies and for many regions in the country which rely heavily on hydrocarbon revenues. But the changing global environment, Sustainable Development Goals agreed upon in the UN institutions in 2015 and the decarbonization agenda, as well as the wellbeing of the whole economic system in the country, challenge this energy mix.

Despite the fact that Russia signed the Paris Agreement in September 2019, decarbonization of the domestic energy sector was not the agenda until recently, when in the end of 2021 President Putin has announced net zero target to be achieved before 2060. GDP energy intensity remains high, constrained by relatively low energy prices and high capital costs. The share of solar and wind energy in the Russian energy balance is insignificant and, according to official forecasts, is not expected to exceed 1% by 2035.

The challenge for Russia in the coming years is to develop a new strategy for the development of the energy sector (at least for energy exports), in response to increasing global competition, growing technological isolation and financial constraints.

There are several factors which define Russia’s attitude toward all these changes and energy transition:

  • Demography and macroeconomics;

  • Resources availability;

  • The role of energy in the Russian economy (including the role of hydrocarbon revenues for the sustainability of the Russian economic system, speed of economic growth and investment availability, as well as technological and financial sanctions);

  • The institutional framework of the energy sector;

  • Climate policy;

  • Technological policy.

2 Demography and Macroeconomics

2.1 Demography

The current population of the Russian Federation is approximately 146 million people and it has been stagnating since the 1990s. The decline of the number of Russian citizens is compensated by migrants (primarily from the former Soviet republics), but there is no population growth envisaged in the future.

2.2 Macroeconomics

GDP annual growth rates in the first decade of this century for the country were of the order of 7–8%. But the global financial crisis in 2008–2009, coupled with the slowdown of global energy demand, resulted in economic recession. The situation was aggravated by the dispute with Ukraine in 2014 and sanctions imposed on Russia, followed by oil price decline in 2014–2016. As a result, Russian GDP growth rates went down to 1.5–2.5% per annum, which is rather gloomy for such an emerging economy as Russia’s. The severity of the impact of COVID-19 on the Russian economy is still unclear, but obviously 2020–2021 will have negative growth, and hence the recession will be even deeper than expected before 2019.

2.3 Impact of Demography and Macroeconomics on Domestic Energy Demand

This situation of stagnant population and economy has significant implications for domestic energy demand—which is stagnating as well. There is no demand for large capacity additions (in fact, the electricity market was oversupplied for the last decade), and together with very limited availability of financing this means that there is no need for massive investment in new assets and capacities. As a result, the existing asset structure in the energy sector gets “frozen” as there are no incentives (and no money) to change it.

3 Resources Available

3.1 Energy Resources

Russia has abundant resources for all types of energy: it ranks #5 among proved oil reserves holders (after Saudi Arabia, Canada, Iran and Iraq—14.7 thousand million tonnes of proved oil reserves or 6.2% of the global oil reserves at the end of 2019); #1 in total proved natural gas reserves (38 trillion cubic meters of proved natural gas reserves or 19.1% of the global gas reserves at the end of 2019); and #2 in total global proved reserves of coal (162,166 tonnes of proved coal reserves or 15.2% of the global coal reserves at the end of 2019) (BP 2020). The country also has the greatest water resources in the world, huge solar energy potential and the largest wind potential in the world, as well as abundant resources for bioenergy, in all its forms—from forestry products and peat to agricultural residues and various forms of organic waste (IRENA 2017).

3.2 Energy Resource Production and Exports

Despite the fact that Russia produces only 3% of world GDP and has a population equivalent to 2% of the world population, it is the third largest producer and consumer of energy resources in the world after China and the US, providing 10% of world production and 5% of world energy consumption. With energy production of about 1470 mtoe, Russia exports over half of the primary energy produced, providing 16% of the global cross-regional energy trade, which makes it the absolute world leader in energy exports (SKOLKOVO-ERI RAS 2019).

Not all energy sources are utilized equally: fossil fuels dominate Russian energy production, consumption and exports. Russia consistently ranks first in the world in gas exports, second in oil exports and third in coal exports (SKOLKOVO-ERI RAS 2019), while renewables represent only a negligible share in the country’s energy exports and about 20% of the country’s total installed power generation capacity (mainly provided by hydropower). Thus, there are enormous opportunities related to renewable energy sources.

3.3 Domestic Energy Consumption

The Russian domestic energy balance is strongly dominated by fossil fuels, with natural gas providing 53% of total primary energy demand, coal 18% and oil-based liquid fuels also 18%. Carbon-free sources of energy in Russia are represented primarily by large-scale hydro and nuclear. The total share of renewables (including hydro, solar, wind, biomass and geothermal) in Russian total primary energy consumption is just 3.6%. Only 17% of Russia’s electricity is generated from renewables (about 90% of that is from hydropower, a legacy of the Soviet emphasis on huge infrastructure projects). Roughly 68% of Russia’s electricity is generated from thermal power and 16% from nuclear power. The government plans to have 4.5% of all electricity generation from renewable sources by 2024 (which seems low in comparison with 17% in the UK or 25% in Germany), while according to the International Renewable Energy Agency (IRENA) 2017 report, Russia has the potential to increase the projected share of renewables up to 11.3% of total final energy consumption by 2030 (IRENA 2017).

4 The Role of Energy in the Russian Economy

4.1 Current Role of Energy in the Russian Economy

Hydrocarbons are the basis of the Russian economic model. Despite the fact that recently oil and gas export revenues have declined from the heights of 2008–2012 under the impact of falling prices for hydrocarbons, nonetheless, oil and gas still provide approximately a quarter of GDP, 40–50% (depending on oil price) of the federal budget revenues, 65–70% of foreign earnings from exports, and almost a quarter of overall investments in the national economy (MINFIN 2020).

At the beginning of the 2000s, Russia managed to dramatically increase energy exports: from 2000 through 2005, they grew by an unprecedented 56% (ERI RAS 2016), exceeding the total energy exports of the USSR, allowing for an incredible acceleration of the national economy and strengthening the country’s position in the international arena as an “energy superpower.” But as the global financial-economic crises came in 2008, energy exports stopped growing. Post-crisis years of 2011–2014 saw still very high oil prices, but stagnant export volumes. Lack of petro-dollar revenues has resulted in GDP stagnation at an oil price of 110 $/bbl, which was clear evidence of deep structural economic problems (Mitrova and Melnikov 2019).

The global move toward a decarbonization paradigm and rising targets on renewables are regarded in Russia as a significant threat for the sustainability of hydrocarbon export revenues and for Russian economic security (Presidential Decree 2017). But as the global situation is undergoing fundamental transformation, and the role of hydrocarbons will inevitably change during the next two decades, Russia will have to adapt. In fact, some of these trends can be observed already today: after high growth rates (7–8% per annum) in the first decade of this century, during the last decade Russia’s GDP performance went down to 1–2% per annum due to the systemic economic crisis, international financial and technological sanctions, and unfavorable investment climate (World Bank 2018). Stagnant economy and stagnant domestic energy demand, frozen domestic regulated prices as well as low investment availability for the new technology deployment—all these factors, which obviously limit the investment capacity, are aggravated by the financial sanctions and weak domestic financial market with very high cost of capital.

4.2 The Future of Russian Energy Exports

Energy transitions globally create new challenges for Russian energy exports: the impact of COVID-19 in the short term and growing share of Renewable energy sources (RES) in the longer term limit global demand growth for fossil fuels, thus resulting in lower than expected export volumes for hydrocarbons. The creation of border carbon adjustments as part of the carbon taxation mechanism might become a long-term source of instability for economies relying on fossil fuels. Moreover, banks and financial institutions are assessing climate risks and becoming more reluctant to provide financing for fossil fuel projects. Together with the existing financial sanctions introduced by the US and EU, this significantly reduces access to the financing of the hydrocarbon projects for the Russian energy companies. Therefore, the longer-term outlook for Russian energy resource exports turns out to be rather pessimistic, peaking in the 2030s and declining afterwards. According to SKOLKOVO-ERI RAS estimations, due to the transformation of the global markets and reduced call on Russian hydrocarbons, the contribution of oil and gas to Russian GDP will fall by approximately half, from 31% in 2015 to 13–17% by 2040 (depending on the scenario) (SKOLKOVO-ERI RAS 2019). Hence, climate-related policies that target a reduction in GHG emissions from hydrocarbons can substantially affect the Russian economy. Summing up, for Russia, as for many other resource-rich and energy-exporting countries, the energy transition creates new long-term challenges, questioning the sustainability of the whole economy, which is highly dependent on hydrocarbon export revenues.

5 Institutional Framework of the Russian Energy Sector

Historically, the Soviet and then Russian energy sector was developed in an extremely centralized way. In the Soviet Union, the economy was managed under complex state development plans (5-year plans) through the hierarchical structure of the energy industries with single transportation, export and storage infrastructure and centralized dispatching. Market reforms and privatization of many energy assets in the 1990s created more competition in the sector, but still today the institutional framework of the Russian energy sector is characterized by high corporate concentration and a lack of market mechanisms. Privatization and decentralization are facing strong resistance from the authorities: they are regarded as a threat to the stability and reliability of the national energy system, as well as to national security.

5.1 Oil Sector

The oil sector has experienced a dramatic transformation in its corporate structure during the last two decades. In the early 1990s the Russian oil sector was privatized and deregulated, and following a very contradictory transitional period, all the key Russian oil production assets found themselves concentrated in the hands of private corporations such as Yukos, Sibneft, Lukoil and Surgutneftegaz—which had become world-class vertically integrated oil companies, while state-controlled Rosneft accounted for less than 5% of the country’s oil production. In the 2000s, however, new trends emerged, and the oil sector gradually became increasingly dominated by state-controlled companies (above all by Rosneft). This process started in 2003 with the Yukos case, when the government for the first time showed its increasing interest in controlling oil revenues. Introduction of the “strategic fields” concept in 2008 marked a new era in the Russian oil sector, with state-controlled companies getting priority access to the most attractive hydrocarbon resources. This strategy was strengthened by the personal ambitions of Rosneft’s CEO Igor Sechin, who has been consolidating assets in Rosneft since 2004, turning it into Russia’s national champion. After a series of acquisitions (initially assets from Yukos, then from TNK–BP), Rosneft’s share of total Russian production reached 40% in 2014. Gazprom’s oil assets have been consolidated in Gazprom Neft, while following Rosneft’s acquisition of TNK–BP, Slavneft may also be considered to have become a completely state-controlled asset, as it is now half owned by state-controlled Rosneft, the other half being owned by state-controlled Gazprom Neft. Moreover, at the end of 2014 the stake of Bashneft, held by Russia’s multi-industry holding AFK Sistema, was nationalized. At the same time, the share of the smaller independent oil companies, which are normally the main drivers of innovations, mobility and entrepreneurship in the oil industry, is just 4%. As a result, the proportion of state-controlled production has increased more than 14-fold to 57% in the course of the ten years and remains nearly the same starting from 2014. The increasing level of Russia’s oil industry concentration and state involvement is making it more and more reluctant to adapt and develop innovations and competition.

Another key institutional challenge for the Russian oil sector is taxation. Tax reform has been under discussion for at least a decade, as the current system of volume-based taxation creates no incentives at all for modernization and the development of smaller fields, or hard-to-recover and unconventional oil. It was not such a significant issue for several decades, as the Soviet-legacy fields were providing sufficient production volumes and did not require any significant investments in their recovery. But now Russian oil production has reached its peak and its possible decline is becoming more and more plausible.

In 2013–2014 a number of tax incentives were introduced for new fields and difficult-to-extract oil reserves. These tax incentives include special reducing coefficients used in the Mineral Extraction Tax (MET) formula, which reflect the degree of exhaustion of reserves, specific geological location conditions and targeted tax benefits applied directly to specific projects—such as MET “tax holidays” for the fields in Eastern Siberia, fields located north of the polar circle, the Azov Sea, the Black sea, the Okhotsk Sea, the Caspian Sea shelf zones, and the Nenets Autonomous District. MET will be zeroed for oil produced in the Sakha Republic (Yakutia), in the Krasnoyarsk region and the Irkutsk region. This zero rate will also apply to ultra-viscous oil. Because of these measures, production decline has slowed in Western Siberia. However, it applies only to a quite limited group of producing assets, not solving the problem on the large scale. Tax preferences and numerous specific exemptions became a typically Russian administrative way to deal with this problem, but at a certain point it might not be sufficient—in 2018, according to the Energy Ministry, up to 50% of all Russian oil was produced under different tax breaks, and, obviously, this system is becoming unsustainable.

5.2 Gas Sector

Differently from the oil industry, the infrastructure-dependent gas industry (regarded as a ‘natural monopoly’, critical for the energy security of the country) was consolidated in the 1990s into a huge state-controlled holding company, which includes gas exploration and production, pipeline transportation, and gas sales in domestic and external markets—Gazprom—in order to concentrate resources in the painful period of non-payments and investment deficit. The gas industry for a long period remained an island of regulated Soviet-type monopolistic structure, and has demonstrated all the disadvantages and inefficiencies of state monopolistic power. Gazprom was designated the “guaranteeing supplier,” responsible for gas supplies to the domestic consumers. Although the law stipulated that the gas transmission and distribution network owner is obliged to grant access to its systems if “there is free capacity available” (RF Government 1997), the access of non-Gazprom producers to the pipeline system was a huge problem in the 1900s and early 2000s, as Gazprom could refuse transportation services for technical reasons and prioritize its own supplies. By that time, Gazprom controlled 94–95% of total Russian gas output. There were several independent gas producers (Itera, Novatek), but their role in the market was insignificant. But, during the last decade, conversely to the trends in the oil industry, the gas sector has started to see increasing competition, which is mainly driven, amazingly, by Rosneft.

The situation began to change after the global financial crisis of 2008–2009, when, with the crises and the United Gas Supply System expansion, capacity constraints were mainly removed, while Gazprom had to limit production volumes due to lower domestic and external demand. Gazprom has had to fundamentally dampen its activities and has gradually started to lose ground to Novatek, Rosneft and other independent producers, who increased their share in Russian gas production from 15% in 2008 to 33% in 2014. There has been huge growth in the number of contracts awarded to non-Gazprom producers by major industrial gas consumers, assisted by their right to sell gas at non-regulated prices. In recent years, these companies have been offering a 3–10% discount on the regulated prices set by the Federal Tariff Service, while Gazprom is obliged to sell gas at regulated prices without any discounts. As a result, already by 2015 non-Gazprom producers controlled nearly half of the domestic gas market supplies, and this situation remains the same to date. Non-Gazprom gas producers are no longer complaining about pipeline access, but mainly about the non-transparency of the tariffs, and access to underground storage and, most importantly for them, to exports.

Currently, due to demand constraints the less profitable domestic market with frozen gas prices is further distorted by gas overproduction. Ambitious upstream plans of non-Gazprom producers and the development of new production by Gazprom (first, the start of the giant Bovanenkovo field in Yamal) resulted in a huge gas bubble on the domestic market, thus increasing tensions between the producers. However, it should be mentioned that this does not necessarily imply the formation of a competitive market—these companies are, in fact, creating regional monopolies. For example, Novatek accounts for nearly 100% of gas supplies to Russia’s largest industrial area, the Chelyabinsk region. Rosneft, through its acquisition of Itera, has also secured the position of 100% gas supplier for the Sverdlovsk region.

At present, all gas market reforms seem to be too risky, especially in the current global geopolitical and economic environment, so the government is clearly postponing all profound changes. Moreover, there is a huge fundamental obstacle for any serious transformation as the Russian State itself is the major stakeholder of the national gas industry with an extensive agenda, regarding gas as an important domestic and international political tool. As long as this is the case, the authorities will need a state-controlled company, performing the functions of guarantying supplies to depressed regions and non-paying customers, providing low gas prices, affordable for the industry and for the population, and cross-subsidizing these social functions and geopolitical export-oriented projects with the help of exclusive export revenues. Thus, the real gas market reform is not advancing.

Gas pricing has been one of the most painful regulatory issues of the Russian oil and gas sector—as gas represents 53% of total Russian primary energy consumption, this question plays an enormous role not only for the gas industry’s performance, but also for the power sector and for the whole economy, which is very much dependent on low gas prices. From the very beginning of the Russian gas industry, it was established by Russian laws and government regulations that natural gas produced by Gazprom and its affiliates should be sold to domestic consumers at government-regulated prices. As a result, artificially low prices formed on the domestic gas market. Such pricing policy stimulated consumers into maximum use of gas, making gas saving unattractive. In 2002, in the situation of stormy demand and looming gas deficit, the government decided to cancel the price freeze and started applying the “cap price” approach in combination with high indexation of prices (of 20–25% per annum) in order to stimulate investment and energy saving. Moreover, under the agreements reached with the EU on Russia’s accession to the WTO, gas prices on the domestic market were to be brought up to a level where they fully covered all costs of the gas producing companies, including the investment component needed for the industry’s development.

In late 2006, a strategic decision was made in favor of accelerating growth of domestic gas prices to ensure a phased transition to export netback levels, that is, equal profitability of supplying gas to the domestic market and for exports,Footnote 1 ensuring gas price growth at the annual level of 15–25% until it reaches the netback level (as it was estimated at that time—by 2011). With the rise of the oil price this date was later postponed until 2015–2018. But, in 2013, as negative processes such as the deceleration of GDP growth, industrial production and fixed investments became very strong, the Russian government finally decided to freeze gas prices, just indexing them with the rate of inflation. As a result, the initial target date to reach netback parity, 2011, was postponed to 2030–2035 (especially after the ruble depreciation in December 2014, when prices expressed in dollars were divided by two, back to the level observed in 2008). Russia became locked in the framework of low state-regulated domestic gas prices. Such indexation, of course, will rob a significant share of gas producers’ revenues on the domestic market and will force them in the longer term to scale back their investment program. The Federal Antimonopoly Service started to promote the switch from regulated prices to spot, referring to the prices of the Saint-Petersburg Gas Exchange, which has been functioning since 2014, though at a very limited scale.

5.3 Electricity Sector

After a long-lasting process of reform, the Russian electricity market finally comprises a variety of different companies—state- and private-owned. State-owned companies dominate—in the power generation sector they control about 70% of capacities, and in the transmission sector they own all high-voltage grids in the country (220 kV and more) and almost all distribution grids as well. Thermal power plants provide for about 63% of total Russian electricity generation and are largely based on outdated technologies (just 25% of gas-fueled power plants have gas turbine or combined cycle technology, and just 22% of coal-fired power plants use supercritical technologies). At the same time, the centralized heat supply and CHP (combined heat and power plants) are very well developed in Russia—almost every city in the country has a unified heat supply system (about 50,000 in total in Russia), and CHP plants account for more than 50% of total fossil-fueled installed capacity (Mitrova and Melnikov 2019).

State-controlled companies produce more than 50% of all oil (Mitrova et al. 2018); domestic prices for oil products are de facto regulated through artificial “freeze agreements,” while the natural gas market is dominated by state-owned Gazprom, with gas prices for both residential and industrial consumers regulated by the government and currently frozen at the level of inflation (Henderson and Mitrova 2017). Three decades since a command economy under the Soviet Union, low prices for energy in Russia are still regarded as a “public good,” and any attempt to increase them sparks strong protests from the consumers. Cheap energy does not create incentives either for energy efficiency improvements, or for the modernization of the existing assets with their high specific fuel consumption.

The controversial and complicated institutional design of the Russian energy sector, with strong state regulation and some elements of market competition, is creating unclear signals for the participants. It is associated with high transaction costs, thus becoming one of the major obstacles for the large-scale energy transition in the country.

6 Climate Policy

Decarbonization is the main driver of energy transitions globally. Despite this global trend, the climate agenda and the drive for decarbonization are not yet essential factors for the energy strategy of the Russian Federation. This very cautious approach toward decarbonization is driven by several factors. Skepticism concerning the anthropogenic nature of climate change dominates among stakeholders—senior representatives of the Russian Academy of Sciences as well as many State officials publicly express their doubts on the very concept of anthropogenic climate change. Very often they refer to the achievements made already by the Russian Federation regarding GHG emissions reduction: following the economic downturn and economic restructuring in the 1990s, Russia de facto reduced greenhouse gas emissions sharply. According to United Nations Framework Convention on Climate Change (UNFCCC) data, the GHG emissions by 1998 compared to 1990 fell by 40.6% excluding land use, land-use change and forestry (LULUCF) and by 50.9% including LULUCF.

In 1998–2008 GHG emissions rose much more slowly than GDP—by about 16% in 11 years (UNFCCC 2018; International Energy Agency (IEA) 2018); by 2014 they constituted approximately 70% of the level of 1990, but since 2009 Russian GHG emissions have been increasing again.

Russia’s enthusiasm for the climate topic is also slowed down by the fact that, as of 2017, the Russian electricity sector has a lower carbon footprint (in terms of g CO2 per kWh) than, for example, Poland, Germany, Australia, China, India, Kazakhstan, the Arab countries of the Persian Gulf, the USA, Chile and South Africa (Staffell et al. 2018). Around 35% of electricity is generated by carbon-free nuclear power plants and large hydropower plants, and 48% comes from gas (Makarov et al. 2017), with gas gradually displacing petroleum products and coal in the fossil-fueled power plants fuel mix (the share of gas in fossil-fueled electricity generation increased from 69% to 74% in 2006–2017).

This background explains why Russia kept itself separate from the global decarbonization trend for a long time. Its participation in international environmental cooperation has always been determined primarily by foreign policy objectives. In Soviet times, participation in global environmental initiatives was a channel of collaboration with the West. In the 1990s, it was a means of integration into the international community and one of the major areas of cooperation with the US. In the 2000s, Russia used the environmental agenda for gaining trade-offs from Western partners along with attraction of foreign investment. At present, the understanding of possibilities to reap benefits from the country’s natural capital is slowly arising among Russian political and business elites, so in the longer term Russia’s involvement in international environmental cooperation may arise. Meanwhile, the status quo is as follows: Russia signed the Paris Agreement in 2016, with voluntarily obligations to limit anthropogenic greenhouse gas emissions to 70–75% of 1990 emissions by 2030, provided that the role of forests is taken into account as much as possible. In September 2019 Russia joined the Paris Agreement and will have to develop carbon regulation and submit its NDAs before the end of 2020.

7 Technological Policy

Not paying serious attention to climate policy, Russia at the same time is very sensitive to technological policy. The country’s leadership realizes clearly that Russia faces the risk of falling behind in the development of new energy technologies that become standard globally. This is the reason for strict requirements on equipment localization for renewable energy and smart grids, and numerous import substitution programs. At the same time, green technologies are definitely not the main focus of Russian technological policy: in the key state document, defining priorities in this area—the State Program “Energy Development” approved in 2014 and amended in 2019—only “promotion of innovative and digital development of the fuel and energy complex” is mentioned as a target, together with all the new technologies in hydrocarbon production and processing—nothing at all is mentioned concerning low-carbon technologies (MINENERGO 2019).

7.1 Energy Efficiency

Factors related to Russia’s cold climate, vast distances, large raw material structure, poor economic organization and marked technological backwardness have resulted in the high energy intensity of its GDP—1.5 times higher than the USA and the world average, and twice that of the leading European countries (ERI RAS 2016). In almost all industrial technologies there is a substantial energy efficiency gap with not only best available technologies but “actual consumption abroad” too. Even with comparatively low fuel and energy prices, the share of fuel and energy costs in the overall production costs in Russia is higher than in the developed and many developing countries (IEA 2011). Before the 2008–2009 economic crisis, Russia was one of the world leaders in terms of GDP energy intensity reduction rates, and the gap between Russia and developed countries was narrowing dynamically—40% reduction of GDP energy intensity within 10 years was achieved in 1998–2008; however, since 2009 this reduction has slowed down and even reversed. According to I. Bashmakov (Bashmakov 2018), GDP energy intensity in Russia in 2017 was just 10% lower than in 2007 (at the same time, the initial energy efficiency target set in 2008 was to reach 40% decline in GDP energy intensity by 2020). Substantial federal budget subsidies were allocated but very limited change occurred, and as a result the initial target was significantly scaled down.

Obviously for such an energy-intensive economy, issues such as energy efficiency and conservation are key for the “Energy Transition”: according to IEA analyses, 30% of primary energy consumption and enormous amounts of hydrocarbons (180 bcm of gas, 600 kb/d of oil and oil products, and more than 50 Mtce of coal per annum) could be saved in Russia if comparable OECD efficiencies were applied (IEA 2011). The main role in reducing the growth of energy consumption could be provided by structural energy conservation (changing the industrial and product structure of the economy), with an increase in the share of non-energy-intensive industries and products. The next most important factor in constraining the growth of energy consumption is technical energy conservation, which can provide a total energy saving of 25 to 40%. However, it will be extremely difficult to close this gap with the OECD countries—it actually widens due to the lack of investment possibilities capable of quickly renewing assets or investing in energy efficiency. If we add to this the continuing administrative barriers and, most importantly, the unavailability of “long money” and of credits for energy efficiency projects for small market participants, coupled with the persistence of relatively low natural gas prices in the long term, Russia remains stuck in a state of high energy intensity. Strong policies are required to change this pattern, accompanied with substantial increase in the energy prices, but potential benefits are also huge.

7.2 Renewable Energy Sources

Carbon-free sources of energy in Russia are represented primarily by large-scale hydro and nuclear (which enjoys strong state support). The total share of renewables (including hydro, solar, wind, biomass and geothermal) in the Russian total primary energy consumption was just 3.2% in 2015. By the end of 2015, total installed renewable power generation capacity was 53.5 gigawatts (GW), representing about 20% of Russia’s total installed power generation capacity (253 GW), with hydropower providing for nearly all of this capacity (51.5 GW), followed by bioenergy (1.35 GW). Installed capacity for solar and onshore wind by 2015 amounted to 460 MW and 111 MW, respectively (IRENA 2017).

According to the draft Energy Strategy of Russia for the period up to 2035, the share of renewable energy in Russia’s total primary energy consumption should increase from 3.2% to 4.9% by 2035. This includes Russia’s approved plan to expand its total solar photovoltaics, onshore wind and geothermal capacity to 5.9 GW by the end of 2024. The existing legislation sets out the terms for participation in the country’s renewables capacity markets. Under this system, energy developers of projects with an output of at least 5 MW can bid for capacity supply contracts with Russia’s Administrator of the Trading System in annual tenders. Winning suppliers are paid both for the capacity they add to the energy system and for the energy they supply, based on long-term 15-year contracts with fixed tariffs. This regulation sets a legal and regulatory environment that allows developers to commercialize capacity as a separate commodity to the power itself, and ensures the economic attractiveness of these projects for the investors. In return, renewables developers are expected to ensure they can provide the promised capacity, along the right timeline and with sufficient localization of the equipment (Power Technology 2018).

Since then annual renewable capacity additions have risen from 57 MW in 2015 up to 376 MW in 2018 (320 MW solar, 56 MW wind). What is more important, a significant decline of CAPEX in the renewables auctions took place during the last two years: by 35% for wind and by 31% for solar, according to the Energy Ministry (Power Technology 2018). This process was not smooth: some capacity auction rounds have struggled to attract bids for a number of reasons, just over 2GW of renewable capacity was awarded in the tenders between 2013 and 2016, while in 2017 the auction resulted in a total of 2.2GW of wind, solar and small hydro awarded in a single round, and in 2018 1.08GW of capacity was allocated between 39 projects.

As technological policy is the main driver of Russia’s interest in renewables, the country is first focused on building its own renewables manufacturing capacity. Russia has set a quite high level of local content required to qualify for the highest tariff rates, an essential component of many Russian renewables projects’ long-term feasibility. The percentage of Russian-made equipment required to avoid tariff penalties was relatively modest in the early days of the auction system, but has now risen to 65% for wind farms and small hydro, and 70% for solar until 2020, with the long-term target level of localization set by the government at 80%. These high levels have been behind several tenders, especially in wind farm development, for which there has been little to no Russian-made equipment.

The problem is that the current support mechanism for renewables will expire in 2024—Russia’s unambitious renewables share targets and ambitious localization targets will almost be fulfilled by this time and an influx of foreign renewables developers might stop if no new incentives for the renewables are created. But in order to create these incentives, the Russian government should first formulate the long-term role of renewables in its energy balance, which is quite difficult to do without a decarbonization agenda. According to IRENA (IRENA 2017), Russia theoretically has the potential to increase the projected share of renewables from 4.9% to 11.3% of total primary energy consumption by 2030. But without a reassessment of the energy strategy priorities and a wider transformation of Russia’s energy system this target could hardly be achieved (Mitrova and Melnikov 2019).

7.3 Decentralization and Distributed Energy Resources Potential in Russia’s Power System

Historically, the Russian energy system was always developed in an extremely centralized way: Russia has one of the world’s largest national centralized power systems with a single dispatch control—as of 2017, the total length of its trunk networks was over 140 thousand km, of distribution networks over 2 million km, and the installed capacity of power plants was 246.9 GW. This energy system was created and historically developed on a hierarchical basis, with centralized long-term planning bodies. For decades, the centralized model has been and still remains the basis of the energy strategy, while distributed energy resources, including microgrids or renewables, are developing slowly and only in remote and isolated areas. The role of distributed generation has historically been significant only in the remote areas of the Far East, Siberia and the Arctic, which are too expensive to connect to the unified national network. However, distributed energy resources (DER) penetration in the centralized system has begun, as is the case elsewhere in the world (Mitrova and Melnikov 2019). Similar to other countries, integration of distributed energy resources into the Russian electricity sector became noticeable in the 2000s, but in the past 17 years it was limited to distributed generation only. The development of this process in Russia is driven not by global climate agenda or energy independency concerns, but by economic considerations of the largest electricity consumers. Almost all Russian large industrial companies (including oil and gas industry leaders like Gazprom, Rosneft, Lukoil, Novatek and Sakhalin Energy) develop their own distributed generation projects in order to obtain more affordable power supply.

Micro-generation using renewables for households in Russia is still largely confined to enthusiasts. There are just a few cases in place in several regions, all of them stimulated almost solely by economic expediency reasons. Non-generation types of DER in Russia are in the very early phase of development. Demand response technologies began to develop in the country in 2016–2017, but only a small proportion of power consumption is affected. Demand response in retail electricity market is in the experimental stage.

However, distributed energy resources have significant potential in Russia. According to the study by SKOLKOVO Energy Centre (Khokhlov et al. 2018), this potential can easily cover over half of needs for generating capacities (about 36 GW by 2035). In order to stimulate the maximum usage of DER technologies systemic changes are necessary in the architecture and policy of the Russian power sector, balancing interests of new players with the existing model.

7.4 Digitalization of Energy as the Government Priority

Digitalization of the energy sector as a whole and of the power sector in particular is part of a global trend, which means that rapidly developing digital technologies penetrate the economy. Russian authorities regard the digital transformation of the energy sector as a technological challenge (also having in mind the high level of current import dependence on all high-tech equipment and the potential threat of sanctions, which could create serious risks for national energy security), and this is the reason why digitalization became the main driver of the “Energy Transition” in Russia. In 2018 Vladimir Putin signed a decree establishing a special state program of “Digital Economy,” in which energy infrastructure is mentioned as one of the key components. The Energy Ministry has also developed its special project “Digital Energy” (Power Technology 2018) focused primarily on digitalization of regulation, coordination and creation of the whole institutional framework for the massive introduction of digital technologies in the energy sector.

7.5 Hydrogen

Russia has huge potential for hydrogen production (grey, blue, green, yellow and turquoise hydrogen production technologies are currently under discussion), but it still remains isolated from the international communities and partnerships developing hydrogen technologies. First, this is explained by the already mentioned fact that the climate change agenda and decarbonization still play a minor role in the energy strategy, which significantly hinders the development of all low-carbon technologies. At the same time, there are abundant resources in Russia to produce hydrogen, and there are some R&D activities in this area (mostly, however, far from commercialization) and prospective domestic demand niches for hydrogen. Currently all their focus is on hydrogen export, because the domestic market does not seem attractive for these technologies. In 2020 the Russian Energy Ministry developed a National Hydrogen Roadmap, which was recently submitted for governmental approval. The major stakeholders of hydrogen development are currently Gazprom and Rosatom, but there is also a list of other actors interested in this area (Rosneft, Novatek, Rosnano, NLMK, Evraz, Roshydro, Gazprom Neft, INK), which also look at different options for how to monetize this hydrogen potential.

8 Prospects of Energy Transition: Challenges and Opportunities

Russia’s attitude toward energy transition is quite controversial: trying to introduce some components of this trend in the traditional centralized manner (first, new technologies), the country is basically refusing to accept its main driver, the decarbonization agenda. Existing strategic documents (primarily the “Energy Strategy Up to 2035,” approved in June 2020 (MINERGO 2020)) do not take energy transition into account. Nevertheless, at a certain point the country will have to develop a long-term vision for both domestic energy market development and export strategy, in order to adapt to the profound transformation of the global energy system. Generally speaking, Russia has many options to participate in energy transition and even to lead some of its dimensions, namely:

  • Energy efficiency

  • Renewables (solar, wind, tidal, biomass—biomethane, pellets, small hydro),

    including potential export projects (Arctic wind, Yakutia solar + DC transmission)

  • Nuclear (next generation reactors on fast neutrons)

  • Natural gas replacing oil in transportation (maritime, road), LNG leadership

  • Hydrogen (blue, green, yellow, turquoise?)

  • Carbon Capture Utilization and Storage (CCUS) (including for Enhanced Oil Recovery (EOR))

  • Offsets (including reforestation/natural sinks investment projects)

But realization of all this potential will depend on the political will and on the overall perception of the decarbonization paradigm in Russia.