IOVERVIEW

Russia’s vast geography is an important determinant of the economic activity. It has the world’s largest proven natural gas reserves and acts as the largest exporter of natural gas. It is also the second-largest exporter of petroleum. Enormous energy resources let producers generate electricity by thermal, hydro and nuclear power plants and also by using gas, oil and coal.

It is worth noting that revenues from the oil and gas industry make up the bulk of the budget of Russia, therefore government regulation in this area plays an important role in the life of the country.

However, due to global market fluctuations and sanctions recently imposed by the United States, European Union and most European countries, Russia is now seeking new markets for the export of petroleum.

On the other hand, since oil, gas and coal belong to the category of non-renewable natural resources, there is the ongoing process of development of renewable energy sources and their implementation in the Russian energy system. It also falls within the general task of reducing the economy’s dependence on the energy sector, particularly oil and gas, repeatedly declared by the Russian government.

The above trends have also led to the creation and development of the relevant legal framework.

The government regulation in this sphere is generally aimed at creating favourable economic and organisational conditions for the activities of the legal entities.

IIREGULATION

iThe regulators

In accordance with its Constitution, Russia is a federated state, comprising 85 constituent subjects, that is, regions within the federation. Some powers are vested exclusively with federal authorities, some are jointly exercisable by the federal and regional authorities, and some are used only by the regional authorities. The Constitution also grants some powers to local (municipal) governments at the lowest level, which are formally separated from the system of the state (federal and regional) government bodies.

The Russian legal system generally belongs to the continental European legal family. The Constitution, federal laws and regional laws form the foundation of the Russian legal system. Presidential decrees, resolutions of the Russian government and the decisions of various ministries are used as by-laws to support and develop the provisions of primary legislation. Local (municipal) governments are also authorised to enact their own legislative acts, though, they have less importance for energy regulation.

The main sources of legal regulation of the energy industry in Russia are the following.

General

  1. The Law on Natural Monopolies No. 147-FZ dated 17 August 1995.
  2. The Law on Procedures for Foreign Investment in Companies of Strategic Significance for National Defence and Security of the Russian Federation No. 57-FZ dated 29 April 2008 (the ‘Law on Strategic Companies’).
  3. The Law on Heat Supply No. 190-FZ dated 27 July 2010.

Electricity sector

  1. The Law on Use of Nuclear Power No. 170-FZ dated 21 November 1995.
  2. The Law on Electricity No. 35-FZ dated 26 March 2003 (the Law on Electricity).
  3. The Rules of the Wholesale Electricity and Capacity Market, adopted by the Decree of the Russian Government No. 1172 dated 27 December 2010 (the Wholesale Market Rules).

Oil and gas sector

  1. The Law on Subsoil No. 2395-1 dated 21 February 1992 (the Subsoil Law).
  2. The Law on Gas Supply in the Russian Federation No. 69-FZ dated 31 March 1999.
  3. The Law on Gas Exports No. 117-FZ dated 18 July 2006.

Renewable energy and energy efficiency

  1. The Law on Energy Saving and Energy Efficiency Increase No. 261-FZ dated 23 November 2009 (the Energy Efficiency Law).
  2. The State Policy on Energy Efficiency Improvement by Use of Renewable Energy Sources, adopted by the decree of the Russian government No. 1-r dated 8 January 2009.
  3. The Decree of the Russian government on the Mechanism for the Promotion of Renewable Energy on the Wholesale Electricity and Capacity Market 449 dated 28 May 2013.

The regulation powers in the energy industry are mainly concentrated at the federal level.

The Russian government is vested with the competence to determine and pursue the state policies and also regulate the economic activities in the whole energy sector, including use of natural resources.

The Federal Ministry of Energy is responsible for implementation of the state policies and regulation in the fuel and energy complex, including electric power, oil extraction and refining, gas, coal, shale and peat industries, major oil, gas and petroleum product pipelines and renewable energy sources. It has the general competence in energy efficiency and heat supply.

The Federal Ministry of Industry and Trade also implements the state policies in the spheres of energy efficiency and use of renewable energy sources but it is mainly responsible for the technical regulation in these areas: adoption of energy efficiency and local content requirements, etc.

The Federal Ministry of Natural Resources and Ecology exercises the state administration in the field of environmental management, protection and safety.

The Federal State Agency on Subsoil Use is in charge of issuance of the licences for subsoil use. It is also responsible for maintaining federal and territorial geological data on subsoil and the state cadastre of deposits.

The Federal Anti-monopoly Service regulates compliance of natural monopoly entities with anti-monopoly requirements. Such natural monopoly areas include:

  1. electric power transmission services;
  2. services on operational dispatch management in the electric power sector;
  3. transportation of oil and petroleum products by major pipeline;
  4. transportation of gas by pipeline; and
  5. thermal energy transmission services.

The Federal Anti-monopoly Service also exercises control over foreign investments in companies having strategic significance for national defence and security. According to the Law on Strategic Companies, the relevant strategic activities include geological surveys on subsoil or exploration and extraction of minerals on subsoil plots of federal significance as well as the activities in the natural monopoly areas as listed above.

Furthermore, the Federal Anti-monopoly Service regulates the state price (tariff) setting for goods (services) supplied by natural monopolies and other entities, including the heating supply, regulated tariffs for electric power (capacity) supply and transmission services and regulated tariffs for gas supply and transportation.

The Federal Service for Environmental, Technological and Nuclear Supervision is generally responsible for performance of the federal state supervision over safe and secure use of nuclear, electric, gas and thermal power grids and facilities and other hazardous facilities.

Finally, the Federal Service for Supervision of Natural Resources Use supervises over proper use of subsoil.

Depending on the particular segment of the energy industry and the regions where the relevant activities are carried out, many of the above federal authorities have the respective structural or regional subdivisions dealing with the dedicated area.

iiRegulated activities

Electricity

From both technological and legal standpoint, the electric power industry includes the following:

  1. production of electric power by generating facilities;
  2. transmission of electric power via grids;
  3. providing the services on operational dispatch management; and
  4. sale of electric power to customers, including end consumers.

Except for generation of nuclear power, no activities relating to production, transmission or sale of electric power require a licence or any other special permit.

However, if the relevant power-generating facility utilises the flammable substances (gas or oil) in the volumes exceeding the established limits, then their operation may be subject to licensing. The same requirement also applies to gas transportation via gas distribution or gas consumption networks with pressure exceeding 0.005MPa.

The relevant licences are issued by the Federal Service for Environmental, Technological and Nuclear Supervision.

Since there are united (national) electricity grid in Russia, electric power transmission services for all major grids are provided by the state-owned joint-stock company Federal Grid Company and its inter-regional and regional subsidiaries. These entities are responsible for operation and development of the Russian united (national) electricity grid.

Other owners of electricity grid facilities can also apply for the grid company status provided that their grids are duly connected to the united (national) grid.

Operational dispatch management services are provided by another 100 per cent state-owned entity – joint-stock company System Operator of the United Energy System. No other companies are permitted to provide the services for operational dispatch management in the electric power sector.

Oil and gas

Under the Subsoil Law, all natural resources, including oil and gas, are state property and are subject to joint jurisdiction of Russia and the region where the relevant natural resources are located. The Russian law does not provide for any rights of an owner or tenant of the land plot to subsoil under this land plot unless it holds the relevant licence.

According to the Subsoil Law, subsoil plots can be licensed for geological surveys, exploration and extraction of minerals for a fixed term or without any time limit. Depending on their significance, subsoil plots can be either federal or regional. As a general rule, the licences are granted following the tender process.

There are several types of licences:

  1. for geological exploration and assessment of a subsoil plot;
  2. for extraction of minerals; or
  3. a combined licence allowing both geological exploration and assessment of a subsoil plot and subsequent extraction of minerals.

Among other things, the terms and conditions of the licence stipulate the production volume and the payments for subsoil use.

The subsoil user who has been awarded the licence has the exclusive right to use the relevant subsoil plot, provided that it duly follows the requirements set out in the licence.

Breach of the terms and conditions of the licence may result in its suspension or termination.

iiiOwnership and market access restrictions

Electricity

Except for generation of nuclear power, there are no special restrictions as to ownership of new or existing power-generating facilities. Therefore, their owners may freely transfer their rights to third parties. However, to access the electric power (capacity) wholesale market, new owners will have to follow the established procedure (see Section IV).

All civil nuclear power-generating facilities in Russia are owned and operated by the state corporation Rosatom, acting through its subsidiary. It is generally prohibited to alienate them to third parties.

As for electricity grid facilities connected to the united (national) grid, their owners may also sell these facilities to third parties but in such case joint-stock company Federal Grid Company, as the entity responsible for operation and development of the Russian united (national) electricity grid, has a pre-emptive right to purchase them.

Oil and gas

The ownership of energy assets relating to oil and gas exploration and extraction is subject to specific restrictions.

The Subsoil Law provides for several requirements to the legal entities that are supposed to receive the licence for subsoil use, namely: technical, technological, human resource and financial capabilities.

Some natural resource deposits are subject to special national security restrictions. In terms of oil and gas, these are deposits with reserves of 70 million tonnes of oil or more or reserves of 50 billion cubic metres of gas or more. Acquisitions of shares or indirect control over the companies that hold the licences to subsoil plots of federal significance are subject to significant restrictions (see ‘Transfers of control and assignments’).

The export of oil from Russia is operated by joint-stock company Transneft, the Russian transport natural monopoly, which operates major oil and petroleum products pipelines.

As for natural gas, joint-stock company Gazprom has a monopoly to export natural gas by pipeline. Historically, this monopoly also extended to the export of LNG.

Gazprom, as the owner of the United Gas Supply System, must provide independent gas producers with access to this system, subject only to availability of the required capacity, compliance of the transported gas with established quality and technical parameters, and availability of pipelines to consumers.

ivTransfers of control and assignments

Pursuant to the Law on Strategic Companies, the following activities are classified as having strategic significance for national defence and security:

  1. geological surveys on subsoil or exploration and extraction of minerals on subsoil plots of federal significance;
  2. electric power transmission services;
  3. services on operational dispatch management in the electric power sector;
  4. transportation of oil and petroleum products by major pipeline;
  5. transportation of gas by pipeline; and
  6. thermal energy transmission services.

Transactions that result in foreign investors or Russian corporate groups with a foreign element gaining control over a company involved in the above activities (the strategic company) must be cleared by the specifically appointed governmental commission.

The procedure for obtaining the relevant approval is lengthy and cumbersome. However, if it is not obtained for a transaction requiring such approval, the respective transaction is deemed void.

Foreign investors are considered to gain control over the strategic company if they are acquiring directly or indirectly more than 50 per cent of the voting shares in the strategic company (or 25 per cent or more, if the strategic company operates a subsoil plot of federal significance) or otherwise gain effective control over the strategic company.

It should also be noted that certain transactions require post-transaction notification, which must be made within 45 days of the change of control taking effect. One example of this is when foreign investors acquire at least 5 per cent of the shares in the strategic company.

The Law on Strategic Companies further prohibits foreign states, international organisations and organisations controlled by them from gaining control over the strategic company.

It also provides that foreign states, international organisations and organisations controlled by them must obtain prior approval from the Federal Anti-monopoly Service when acquiring directly or indirectly more than 25 per cent of the voting shares in the strategic company (or more than 5 per cent, if the strategic company operates a subsoil plot of federal significance).

Moreover, the foreign investments in the Russian energy sector are also covered by the general restrictions of the anti-monopoly legislation with respect to economic concentration.

IIITRANSMISSION/TRANSPORTATION & DISTRIBUTION SERVICES

iVertical integration and unbundling

Electricity

As part of the Russian electric power industry’s complex shift towards decentralised public regulation, the Law on Electricity, as a general concept, determined that economic relations in this sector are based on market mechanisms and competition. At the same time, the Law on Electricity provides for such concepts as energy security and uninterrupted and secure operation of the electric power sector.

As a result, the Russian electricity and capacity market today includes both typical market elements and public regulation mechanisms.

On the one hand, production of electric power in hydropower and nuclear power industries are currently highly concentrated. As mentioned above, there are also natural monopolies in the areas of electric power transmission services and services on operational dispatch management.

On the other hand, many relatively small generating companies, including foreign ones, are admitted to the wholesale market in thermal power generation or renewable energy sectors. And their share is increasing.

Oil and gas

There are several vertically integrated joint-stock companies in the oil and gas sector. The major ones are Rosneft, Lukoil, Gazprom neft, Surgutneftegas and Tatneft. There are both privately owned companies (in some cases, with a substantial foreign stake) and state-owned companies among them.

Historically, the concept of vertical integration was used from the beginning of economic reforms in the late 1990s. Now the general structure of the market players is stable. Active foreign investments in the sector are restricted as a result of sanctions imposed by the United States, European Union and most European countries.

iiTransmission/transportation and distribution access

Electricity

In Russia, it is declared that any third party is granted non-discriminating access to such services as electric power transmission and operational dispatch management.

Since the above services belong to natural monopolies, the rules of access are generally regulated by the Wholesale Market Rules and have to be followed by both producers and consumers of electric power and operators (owners) of transmission and distribution facilities.

Oil and gas

Similarly to the electricity sector, it is declared that any third party may access oil and petroleum product transportation services via major pipelines to consume these products on the Russian domestic market and for their export.

The same also applies to non-restricted access to the gas market and particularly gas transportation and distribution networks.

Since the above transportation and distribution services belong to natural monopolies, the rules of access are generally regulated by the officially established rules that have to be followed by both producers and consumers of oil and petroleum products and gas and operators (owners) of transportation and distribution facilities (i.e., Gazprom for gas networks and Transneft for major oil pipelines).

iiiRates

Electricity

As stated in the Law on Electricity, the prices (tariffs) applied by entities providing the electric power transmission services are publicly regulated. The Russian government established the guidelines for pricing and the rules for state regulation of the prices (tariffs) in the energy sector.

According to the established rules, the primarily goal of the pricing is to balance economic interests of producers and consumers of electric power and also ensure return of capital investments. This pricing should also consider requirements and incentives provided by applicable laws on energy efficiency and renewable energy.

The prices (tariffs) may be set either numerically or as a formula or principles of calculation of such prices (tariffs).

To ensure predictability and stability, it is expressly provided that the prices (tariffs), specifically for electric power transmission services, are set on a long-term basis (i.e., for a minimum of 12 months, unless otherwise provided by law or governmental decision.

Oil and gas

Oil prices are not regulated in Russia. They are mainly based on current market fluctuations and depend on the rates of applicable taxes and duties.

The Russian government establishes the principles for setting gas prices and tariffs for gas and oil transportation. These principles take into account reasonable expenditures and profits as well as investments to transportation networks. Tariffs may be also differentiated depending on the territories of Russia.

ivSecurity and technology restrictions

The fuel and energy complex facilities in Russia are subject to both physical protection (against technological accidents, acts of terrorism and other unauthorised intervention) and cybersecurity.

According to the Law on Security of Critical Information Infrastructure of the Russian Federation No. 187-FZ dated 26 July 2017, information and automated management systems, which are used in the energy sector, in the sphere of nuclear energy or in other sectors of fuel and energy industry, are attributed to facilities of critical information infrastructure. Depending on their importance, these facilities must be officially categorised. The owners of these facilities have to elaborate and adopt the internal regulations on providing security of their critical information infrastructure.

Additional requirements are provided to critical facilities of critical information infrastructure. In particular, in these critical facilities it is prohibited:

  1. to grant remote access to software and hardware to persons who are not employees of the owner;
  2. to have local non-controlled access to software and hardware to persons who are not employees of the owner; and
  3. to transfer the information to the developer or manufacturer of software or hardware without control by the owner.

IVENERGY MARKETS

iDevelopment of energy markets

There is no common market for electric power (capacity) and oil and gas in Russia.

Russia’s electricity and capacity sector includes a wholesale market and a retail market for electric power and capacity.

The wholesale market’s participants are large producers and customers of electricity and capacity.

Different from the wholesale market, the retail market resells electricity to end consumers, generally at publicly regulated tariffs.

The Wholesale Market Rules, among other things, set out the procedure for accessing the wholesale market as well as the wholesale market operation concepts.

The main concepts of the wholesale market operation include:

  1. free non-discriminatory access to the wholesale market for all electricity sellers and customers;
  2. free choice by the wholesale market’s participants for the method of electricity sale and purchase;
  3. accounting specifics for certain wholesale market participants; and
  4. obligatory purchase of capacity by the wholesale market participants when required by the Russian government.

As for oil and gas markets in Russia, they can be subdivided into the domestic market and export market.

iiEnergy market rules and regulation

Electricity

As mentioned above, the wholesale market is regulated by the Wholesale Market Rules.

The Russian government further determines zones (territories of Russia), where market prices or regulated tariffs must apply, including technologically isolated zones that are not connected to the Russian united electricity grid.

Oil and gas

The gas market in Russia is generally regulated by the Rules of Gas Supply adopted by the decree of the Russian government No. 162 dated 5 February 1998. These Rules govern relations between suppliers and purchasers of gas, including gas transportation and distribution companies.

In the gas supply sphere, the state pricing policy is designed to:

  1. create favourable conditions for seeking, exploring and developing gas deposits, extracting, transporting, storing and supplying gas;
  2. expand the sphere of application of market prices to gas;
  3. exercise control over application of state regulated prices (tariffs) in the gas supply sphere;
  4. reimburse the organisation owning the gas supply network for gas payment debts incurred by non-disconnectable consumers;
  5. encourage use of gas as a motor fuel; and
  6. ensure the competitiveness of Russian gas on the world energy market.

iiiContracts for sale of energy

Electricity

According to the Wholesale Market Rules, the large suppliers and customers of electricity and capacity, as a condition to accessing the wholesale market, must enter into a contract for connection to the trade system of the wholesale market, and thus become members of a self-regulating organisation of wholesale market participants (the Market Council).

The main goals of the Market Council are to maintain a balance of interests among the wholesale market participants, and ensure the integral operation of its commercial infrastructure. In pursuing these goals, the Market Council, among other things, keeps a register of the wholesale market participants, sets out the wholesale market regulations and standard forms of contracts used by its participants, and monitors so that participants comply with these regulations and contracts.

In addition, an important role in the wholesale market is played by organisations that provide it with technological and commercial infrastructure. One such infrastructure organisation is a commercial operator that is noted specifically for its activities to arrange for trade on the wholesale market. In particular, it holds tenders, and registers electricity and capacity sale and purchase contracts made on the wholesale market.

The existing wholesale market consists of a number of segments, each of which has its own terms and conditions of entry into electricity sale and purchase contracts.

For instance, in the regulated contracts segment, electricity is sold at set tariffs and the commercial operator selects, at its discretion, suppliers and customers that are required to enter into a relevant electricity supply contract.

This method largely applies where electricity is sold to the general public. This segment also covers the sale of electricity generated with renewable energy sources, in which case tariff rates are based on the localisation level of the relevant generating facilities.

On the day-ahead spot market, electricity sale and purchase contracts are based on the equilibrium price determined by the commercial operator, which compares and selects the competitive price bids submitted by suppliers and customers.

Finally, in the non-regulated electricity segment, contracts are made between suppliers and customers by terms negotiated between them (including the price and scope of supply).

A separate part of the wholesale market is the capacity market, where suppliers provide their customers with a fee-based right (and often an obligation) to enter into future contracts for the purchase and sale of certain volumes of electricity.

The created capacity market facilitates issues such as the financing of new generating facilities, compensation for electricity producers’ fixed costs, and ensuring electricity supply reliability and security.

As in the case of the electricity sale and purchase market, contracts made on the capacity market may be either regulated or non-regulated.

Oil and gas

Gas is supplied on the basis of agreements between suppliers and consumers in accordance with the general civil laws and the rules approved by the Russian government for gas supply and use of gas in Russia.

The pre-emptive right to conclude gas supply agreements is enjoyed by the purchasers of gas for state and municipal needs, utility, domestic and social needs of the people.

ivMarket developments

Electricity

The Russian electricity and capacity market today is a complex structure that consists of both typical market elements and public regulation mechanisms. The main problem with the existing system is low competition, owing to, on the one hand, the need for the smooth and reliable operation of the electric power sector and, on the other, the relatively small number of electricity and capacity sellers on the wholesale market.

New incentives are currently being sought for more competition on the market, particularly, by increasing the sales of electricity (capacity) produced using renewable energy sources.

Oil and gas

According to the Energy Strategy of Russia for the period up to 2030 adopted by the decree of the Russian government No. 1715-r dated 13 November 2009, the main goal in the oil and gas sector is to diversify the export markets away from the core European market to prospective eastern markets, and to develop oil and gas production and energy infrastructure in the northern Arctic, east Siberia and the far east of Russia. Another objective is to develop and deliver the LNG.

VRENEWABLE ENERGY AND CONSERVATION

iDevelopment of renewable energy

After years of being considered an ‘oil-and-gas country’, the Russian government decided to develop a renewable energy sector and promote renewable energy projects in the country.

The legal framework for this progress was set up in 2009. The Russian government approved the State Policy on Energy Efficiency (the Policy), and subsequently adopted the National Strategy for the Development of Renewable Energy. Both documents became the basis for adopting more specific regulation establishing this new legal regime.

By this new legal regime Russia replaced the ‘premium scheme’, where the Russian Government had proposed to motivate market players through premium payable to them, with the ‘capacity supply scheme’.

The capacity supply scheme implies a predetermined price paid to the capacity supplier which is based on the beneficial tariff. The supplier who met the Russian localisation requirements can use this beneficial for 15 years and thus receive the guaranteed return on the investment used for building and operating a renewable energy generating facility with a 12–14 per cent margin.

The existing legal regime applies to solar, wind, moderate-sized hydro and waste treatment power sources generating more than 5MW of renewable power.

The capacity volumes are offered to potential suppliers at annual tenders, which are conducted by the Market Council for each type of power-generating facility: photovoltaic, wind and water energy. In 2017, the procedure was extended to waste-burning energy sources.

The winners of each tender conclude long-term energy supply agreements (CSAs), under which a capacity supplier must build its renewable-energy-generating facility and put this facility into operation by a certain date defined in the CSA. The capacity should then be supplied to the Russian power system, where large industrial consumers are obliged to buy it. A mandatory CSA form is approved by the Russian government and cannot be renegotiated by the potential supplier.

Failure to meet the deadline for implementation of the renewable energy project indicated in the respective CSAs may lead to a significant contractual penalty.

The Policy covers the period until 2024 with the goal of ensuring that the share of renewable energy reaches 4.5 per cent in the entire energy sector. During 2018 and 2019, tenders of 95 per cent of the targeted power generation capacity in the solar and wind sectors have been awarded to the potential suppliers. Therefore, the renewable energy market awaits the new regulations that will govern its activities after 2024.

The current framework has raised many controversies. Large industrial consumers have objected to the extension of the Policy, instead calling for the adoption of alternative measures to support the renewable energy sector. The main reasons for their dissatisfaction are the price of the power capacity and the increase in the costs of implementing the renewable energy projects. However, the key investors of the Russian renewable energy sector (such as Rusnano and Renova) have requested the extension of the Policy until 2035. These companies believe the Russian renewable energy sector is still too young to function under the general competitive rules of the Russian energy market applicable to other sectors.

While the outcome of this dispute is still not clear, the Market Council initiated development of the concept of Russian green certificates, which may be used to supplement the existing structure. Work is being done by the Market Council in this respect; thus, for the first time in Russian history, the concept of Russian green certificates is starting to seem a workable option. By selling these green certificates, consumers could reduce their total amount of payments for capacity under the current support mechanism of CSAs, while for the power suppliers, the green certificates could act as a source of return on their investments.

Consequently, the Russian renewable energy market is now waiting for future changes in the legal regime. Such changes will certainly give a new impulse to further development in the industry.

iiEnergy efficiency and conservation

The Energy Efficiency Law created a legislative, economic and organisational stimulus for energy saving and increasing energy efficiency.

To facilitate the efficient use of energy resources and to support and encourage energy saving, the Energy Efficiency Law provides for several groups of energy efficiency requirements applicable to various sectors, notably including the construction and the public sectors. For instance, energy consumption reduction targets are set for publicly financed institutions. Moreover, companies with state participation and companies carrying out regulated types of activities are also obliged to adopt and implement programmes aimed at increasing energy efficiency.

According to the Energy Efficiency Law, commercial companies may carry out the voluntary energy audit. This audit is aimed at:

  1. collecting objective data on the volume of energy used;
  2. defining energy efficiency indicators;
  3. defining the energy saving potential and increasing energy efficiency; and
  4. developing and evaluating a list of possible programmes which target energy efficiency increase.

The results of the energy audit must be reflected in an energy passport comprising information on the presence of energy meters, the volume of energy used and the variation of such volumes, etc. Copies of energy passports are forwarded to the Federal Ministry of Energy, which is responsible for processing, systematising and analysing the information contained in these passports.

Instead of energy audits, state and local authorities, as well as state-owned and municipal institutions, have to submit annual declarations of electric power consumption.

In order to encourage private investors to participate in the energy efficiency programme, the Energy Efficiency Law proposes a range of financial and tax incentives. Such incentives for commercial companies include, in particular:

  1. investment tax credits of up to 100 per cent for companies investing in energy efficiency and energy saving technology;
  2. accelerated depreciation of assets categorised as having high energy efficiency or assets classified in the top energy efficiency class (the qualifying assets);
  3. three-year corporate property tax exemption on newly accounted for qualifying assets; and
  4. partial compensation of interest on loans granted by Russian banks for the purpose of investing in energy saving and more energy-efficient technology.

iiiTechnological developments

Setting up a new legislative basis and further efforts taken to implement the Policy brought complex technologies to the Russian renewable energy sector.

Russian localisation rules, aimed at the development of local production in the renewable energy sector, significantly impact the economics of the projects. These rules stipulate that a certain percentage of the elements and spare parts of the energy-generating facility are to be produced in Russia in order to apply a beneficial capacity price. The potential supplier must commit to a certain degree of localisation when bidding and, if this level has not been reached, the beneficial tariff shall not apply and the capacity price will be significantly lower.

To meet the above requirements, global Russian corporations involved in renewable energy projects usually create joint ventures with large foreign technology owners and local companies. The local partner is usually responsible for handling local issues of the renewable energy projects that may arise during the construction and operation of the generating facility. The use of such joint venture structures enables the creation of a strong team that can effectively support the implementation of the renewable energy project.

VITHE YEAR IN REVIEW

Similarly to previous years, the energy market in Russia, especially the export side, has been developing in 2018 under the pressure of US and EU sanctions that restrict access of the Russian oil and gas companies to foreign investment and technology. It has encouraged these companies to seek cooperation with investors from the Middle East and China.

After a tremendous boost in 2016–2017, the renewable energy market (mainly, wind and solar photovoltaic) has continued to increase its share in the energy sector with the aim of reaching 4.5 per cent by 2024.

New LNG treatment and distribution facilities have been commissioned in the northern regions of Russia.

VIICONCLUSIONS & OUTLOOK

It is difficult to overestimate the importance of the energy sector in the Russian economy.

Traditional industries such as oil and gas, as well as power generation by thermal (coal), hydro and nuclear power plants continue to be the basis of both economic development and national security.

On the other hand, these industries are highly affected by the current political tensions in international relations between Russia and other countries.

In response to US and EU sanctions, Russia’s local content requirements have become one of its main economic policy drivers supporting inbound investments and technology transfers to develop local innovative technologies, including in the renewable energy sector.

We expect further development of the Russian energy sector. However, the relatively high level of uncertainty may lead to a search for new alternatives and opportunities.


Footnotes

1 Thomas Heidemann is a partner, Dmitry Bogdanov and Anastasia Makarova are senior associates, and Anna Sivkova is an associate at CMS Russia.