Is Russia on the cusp of a green revolution?

26 JUNE 2017

BNE Intellinews
Christopher Stakhovsky

The latest round of Russian sanctions, passed by the US Senate on June 15, may if finally adopted actually turn out to be a blessing in disguise for Moscow. Bill No. 232 blacklists non-US companies (read, European) trying to invest in high-tech drilling projects where Russia doesn’t (yet) have the knowhow to go at it alone– such as Arctic drilling, offshore drilling or fracking.

However, while investors reacted poorly to the news, with the Micex stock market index falling to its lowest level in 15 months, most analysts agree that the business climate will not change under the new sanctions regime as major oil and gas producers have already adapted to life with Western sanctions.

Other than sending a symbolic message to Moscow that a rapprochement is off the table, what could these sanctions actually achieve? In fact, few seem to have noticed that the Russian economy is not just out of a two-year recession, but is actually going through a major shift: Moscow is trying to hedge its reliance on the dominant oil and gas sector.

Earlier this month, at the St Petersburg International Economic Forum, Anatoly Chubais – the man behind the country’s 1990s privatisation drive – hailed the advent of renewables and claimed that green energy will hit Russia with the force of “the Great Socialist Revolution”. He is not the only one thinking about it – Alexey Texler, the Deputy Energy Minister, told a conference in Abu Dhabi that green power would be “profitable for the Russian economy” and said the country aimed to boost renewable energy production by 1,000% over the next 20 years.

It’s no surprise then that according to the latest economic figures available, the non-oil economy is actually growing faster than the hydrocarbon sector. The budget deficit, calculated without oil and gas revenues, has fallen to nine-year lows, while the share of fossil fuels in the Russian budget overall is expected to decline slightly this year (from 38% to 37%). At the same time, the economy is slated to grow at a better-than-expected 1.3 per cent in 2017, up from the -0.2 per cent registered last year.

With the Russian economic outlook in the black, the government is now readjusting its industrial policy and throwing green energy into the mix. At the end of May, Moscow issued tenders for contracts to build 2.2 GW of renewable energy capacity, create jobs and attract foreign direct investment. Crucially, green energy does not fall under the sanctions regime, meaning that Russia has more access to both Western funds and technology. Finland’s Fortum and Itay’s Enel were among the biggest winners, securing more than half of the tenders.

Waking the sleeping land

Next, as commodities prices return to more palatable levels, some of Russia’s largest metals and mining companies are shifting their focus to Siberia, a massively underexplored and underdeveloped region. Backed by incentives from the government, several of the sector’s biggest names are investing large sums in Siberia to develop their latest projects and are banking on renewables to power their expansion. The region, known as Russia’s “sleeping land”, managed to record GDP growth in both 2015 and 2016 and is set to be a major beneficiary of Russia’s next wave of industrial development – and the renewable revolution that will accompany it.

Companies such as Rusal are at the front of the queue. The global aluminium heavyweight is pushing ahead with the construction of its Taishet aluminium smelter, the second phase of the BEMO project and an expansion of the Khakas smelter, which are set to add more than 1mn tonnes of extra production capacity when finished.

At the same time, Norilsk Nickel is at an advanced stage of development of its Bystrinsky project, a huge copper deposit located in Siberia’s Baikal region, while Polyus and Rostec are preparing to develop the Sukhoi Log gold deposit. Moreover, the Russian government recently announced a $350mn investment to boost rare earth mining in the Yakutia region and the Kola Peninsula along with funds for research and development. These projects are set to fuel economic growth in the region in the coming years, potentially creating thousands of jobs for the local population.

However, industrial operations on this scale will require enormous amounts of energy. Industry analysts have put forward a conservative estimate of a 20% increase in power demand in the region by 2022, which will put considerable strain on Siberia’s current power supplies: considering just the Rusal projects, the increase in potential energy demand may reach almost 30 terawatts per hour.

Hydropowered future?

And here is where renewables come in: despite Russia’s vast hydrocarbon reserves, hydropower is much better suited to power the country’s future economic growth. According to BP’s latest Statistical Review of World Energy, hydroelectricity consumption in Russia grew by 9.5% year-on-year in 2016.

Currently, hydropower capacity accounts for almost half of Siberia’s installed generating capacity and its share of output is expected to grow from 48% in 2016 to 51% by 2022, far above all other Russian regions. The global consensus in favour of sustainable growth and a move away from fossil fuels, coupled with the renewed and extended sanctions on the oil and gas sector, could actually kick-start Russia's renewable sector.

Companies such as En+ Group have sufficient capacity to accommodate increased demand in Siberia . En+ Group, the world’s largest private hydropower company by capacity, operates four hydropower plants in Siberia, producing green energy at one-sixth the cost of conventional fuel. With energy intensive mining on the rise, the company plans to expand renewable energy projects in Siberia to meet the rising demand for energy.

The influence of Russia’s oil and gas giants has long hindered efforts to invest in the necessary infrastructure to roll out renewable power on a grand scale, but Siberia’s untapped potential and the tightening of the sanctions regime could turn the tables.

And not a minute too soon: Russia’s most recent security strategy labels the green revolution as an economic threat to the country, saying that “changes in the structure of world demands for energy resources and structures of their use, the development of energy storage technologies and the falling material-output ratios, the development of green technology” have left Moscow at a disadvantage.

While the transition away from fossil fuels will not happen overnight, it’s clear that the best days of oil and gas are behind us, and Moscow is losing fast both economic and political reasons to encourage the development of fossil fuels. Which is why Siberia’s bet on linking economic growth to hydropower should be seen as a harbinger of things to come.

Christopher Stakhovsky is an independent European energy policy consultant based in Paris.