While Russia has one of the largest conventional energy reserves in the world, it continues to incentivise the development of renewable energy projects through the renewable energy capacity auction scheme, endeavoring to make use of its vast land mass, particularly in the Russian Far East, for wind and hydro projects and addressing the growing problem of waste management with the development of waste to energy recycling facilities.

Renewable Power Regulations

In 2013, Russia introduced regulations allowing renewable generators to bid, through an auction process, for the opportunity to enter into long-term contracts for the sale and purchase of capacity for future projects that use capacity payments to secure a return on investment, including renewable power projects.^[1]

To date, Russia has conducted six renewable energy auctions. As a result, a number of renewable energy projects have been installed or are under construction. 

2018 Capacity Auction

The latest renewable power auction took place in June 2018. The auction resulted in 1.04 GW of design capacity being awarded among 39 renewable power projects, as follows: (i) 853 MW awarded to wind projects; (ii) 148 MW awarded to solar projects, and (iii) 40 MW awarded to small hydropower projects.

This year's auction was marked by a high level of competition among bidders, including in respect of wind power generation, which previously had shown lower interest in Russia, as well as small hydropower projects. The previous lack of interest in small hydropower and wind projects is reported to be due to the high local content requirements and the absence of relevant equipment produced or otherwise localised in Russia.

The local requirements for wind projects can now be met through equipment localised and produced by Vestas Manufacturing Rus (Nizhny Novgorod region). In May 2018, Vestas started to produce wind turbine nacelles, which required an investment of more than 5.2 million dollars and created over fifty work positions in the region. Other producers, such as SGRE (Siemens-Gamesa Renewables) and Lagerwey, are also preparing to enter the Russian market. While the local content requirements for solar projects are also high, there have been locally produced solar panels used in a number of solar projects in Russia.

The increased competition has resulted in a significant decrease in the capital expenditures claimed by the bidders to be reimbursed through capacity payments.

Waste as a New Source of Renewable Energy

In addition to solar, wind and hydropower, in 2017 waste became the fourth source of renewable energy entitled to benefit from the capacity auctions and the long-term capacity supply agreements.^[2]

The auction conducted in 2017 awarded long-term capacity supply agreements to five projects for the construction of waste recycling facilities for the total of 335 MW of design capacity. Four of the projects will be located in the Moscow region and one project will be located in the Republic of Tatarstan. These projects are intended to reduce the amount of waste in Russian landfills by 7% by 2023.

The Russian Government further announced two new waste recycling facilities with an aggregate of 110 MW of design capacity to be constructed in the south of Russia. The capacity auctions conducted for these facilities were also held in 2018; however, they failed due to the absence of bidders. The lack of interest reportedly resulted from the requirement for the bidders to provide a performance guarantee in respect of their obligations to construct the facilities, which increased the financial burden on the developers. We understand that similar requirements were waived by the authorities with respect to the waste recycling facilities mentioned above. We understand that a new auction is likely to be conducted again for these facilities on modified terms.

In June 2018, Russia introduced additional incentives for waste recycling facilities, which include a reduction in the environmental fees payable by such facilities. These facilities will pay fees seven times lower than other industrial facilities for their reduced negative impact on the environment. The payments required to be made by owners of landfills will increase by 15% by 2025, which is meant to make waste recycling more attractive as a business for waste management companies.

^[1] For more information please refer to our articles (i) “Russia's Second Renewable Energy Auction Gives Both Glimmer of Hope and Cause for Concern” in King & Spalding’s Energy Newsletter, July 2014, and (ii) “Renewable Energy In Russia: Recent Developments” in King & Spalding’s Energy Newsletter, April 2016.

^[2] Resolution of the Government of the Russian Federation No. 240 “On amendment and restatement of certain resolutions of the Government of the Russian Federation on renewable energy sources at the wholesale power and capacity market” dated 28 February 2017.