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Russian renewables tender could quadruple the country’s wind capacity

25 August 2021 William Fleeson

An upcoming tender for multiple renewable energy projects in Russia could spur a four-fold increase in the country's wind capacity—if stringent terms on local content don't get in the way.

The two-stage solicitation, which is accepting bids between 3-9 September, aims to attract up to 6.7 GW of clean energy build. The second stage will run 10-16 September. Out of its total energy capacity, about 4.1 GW is for wind, about 2.4 GW for solar photovoltaic, and about 200 MW for small hydropower.

For wind in particular, the tender would increase Russia's capacity by several times its current size. The country has less than 1.4 GW of wind capacity now, according to the Russian Association of Wind Power Industry (RAWI), a trade group.

The tender will offer contracts worth a total of about $4.9 billion and will be administered by the Russian Energy Agency (REA), a branch of Russia's Ministry of Energy. The REA administers efforts within Russia on renewables, environmental sustainability, and energy efficiency, among other policy areas.

The September event will make good on plans the Russian government unveiled in October 2020 to adjust how projects are compensated. Successful bidders will for the first time receive payments under a contract-for-difference mechanism, a common power contract type around the world, by which an electricity provider is paid a fixed rate even if actual power prices rise higher or lower. Previous REA tenders compensated projects only on the basis of capital costs.

"This tender is a big, long-awaited event for the industry," said Konstantin Samarin, a senior analyst in IHS Markit's Russia and Caspian Energy (RACE) service.

RAWI, in a 17 August response to the tender's publication, lauded the contract updates as "gamechangers." The group said the new terms could accelerate clean energy cost declines in Russia and bring renewables closer to "grid parity," or equivalent power costs, with hydrocarbon fuels like coal and natural gas.

In another first, selected bidders will also receive compensation for the operating expenses, or opex, of generating power. The new policy, referred to as a "one-rate tariff," is intended to drive efficiencies in operations and maximize energy output.

Projects must have a start-up date between 2023-2035. The tender is the second such program to stimulate clean energy growth in Russia, and the September timing follows a postponement from the event's original scheduling in July.

The total of existing and new wind capacity could amount to as much as 5.5 GW—nearly four times current levels. According to RAWI, most current and projected wind sites are in Russia's west and southwest, where the combination of wind conditions and industry presence have encouraged the sector to grow. Several operating wind farms are located in Crimea, the Black Sea peninsula under territorial dispute since 2014 between Russia and neighboring Ukraine.

The tender's ambitious scale comes with a constraint, in that local content requirements—in this case, the parts and equipment that come from Russian sources—are twice as high as REA's previous request for proposals.

The tender also specifies that the export-related penalties would apply not only to the wind equipment manufacturer, but also to the investor.

RAWI warned that the higher local content terms cast a shadow over the tender's chances for success in driving greater wind build—and could hinder healthy market conditions.

"This seriously raises barriers to market entry for new entrants and leads to market monopolization," RAWI said.

Samarin, taking a longer-term view, acknowledged that the local content rules may pose an issue for the tender's participants. But opportunity could also flow from the state-mandated rise in demand, he said.

"Stricter stipulations on local content may indeed [cause] trouble for generators, as seen from the present," Samarin said. But raising demand will benefit Russian equipment manufacturers, a type of "stimulation" that "remains another industrial priority for the Russian government," he said.

IHS Markit expects Russian renewables to reach 10 GW of capacity by the end of the tender's contract period in 2035. Renewables as a share of total Russian power will rise to 4% by the same year—up from just 0.3% today, according to recent analysis from the RACE service.

That share could rise to 5% by 2050, the service says, though that result is "highly uncertain" given policy and economic changes over the longer period.

Russia's efforts to grow wind and other renewables capacity will help the country decarbonize. The country was the world's sixth-largest emitter of GHGs in the world in 2020, according to IHS Markit data. As a member of the Paris climate accord, Russia has committed to a 30% reduction of GHGs by 2030, relative to 1990 levels. The terms of Russia's Paris pledge do not include specific figures for renewables development.

Posted 25 August 2021 by William Fleeson, Senior research analyst for Executive Briefings, IHS Markit

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