ENERGY TRANSITION IN RUSSIA

Russia is quite an important player in the global energy system: with just 3% of the global gross domestic product (GDP) and 2% of the global population, it provides 10% of global primary energy production, 5% of global primary energy consumption, and 16% of international energy trade. Russia is the world’s largest exporter of energy resources (#2 for oil exports, #1 for gas exports, and #3 for coal exports in 2017. It ranks fourth in the world—after China, the USA, and India—in primary energy consumption, production of electricity, and carbon dioxide emissions due to the utilization of oil, gas, and coal for combustion-related activities. Given this significant input, Russia’s strategic behavior regarding the energy transition is important not only for the country itself, but also for the rest of the world.

For Russia, the energy transition creates new long-term challenges, questioning the sustainability of the entire economy, which is highly dependent on hydrocarbon export revenues. Hydrocarbons provide 25% of GDP and 39% of the country’s federal budget revenues, 65% of foreign earnings from exports, and almost a quarter of overall investments in the national economy.

Globally rising renewables targets and the transition towards a decarbonization paradigm are regarded in Russia as a significant threat to hydrocarbon export revenues, and thus to Russian economic security. However, the global market balance is undergoing a fundamental shift, and the role of hydrocarbons will inevitably change during the next two decades. According to estimates by the Energy Research Institute of the Russian Academy of Sciences (ERI RAS), with the transformation of the global markets and reduced call for Russian hydrocarbons, the contribution of oil and gas to Russian GDP will decline by approximately half, from 31% in 2015 to 13–17% by 2040. Therefore, climate-related policies that target a reduction in GHG emissions from hydrocarbons can substantially affect the Russian economy.

Institutional design of the Russian energy sector

The institutional framework of the Russian energy sector today is still characterized by high corporate concentration and a lack of market mechanisms. Decentralization as a concept faces strong resistance from both the authorities and major business stakeholders. It is quite frequently regarded as a threat to the stability and reliability of the national energy system, and to national security. Low prices for energy in Russia are still regarded as a “public good”, and any attempt to increase them sparks strong protests from consumers. The rather cheap energy does not create incentives for energy efficiency improvements, or for the modernization of existing assets with 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, creates unclear signals for participants. It is associated with high transaction costs, and thus represents one of the major obstacles to large-scale energy transition in the country.

Russian climate policy

Decarbonization is the main driver of energy transition globally. Individual regions, countries, or their associations set goals for reducing the carbon footprint in the energy sector and introduce mechanisms to stimulate this process, such as carbon taxes or emissions trading systems. Despite this global trend, the climate agenda and the drive for decarbonization are not yet essential factors in the energy strategy of the Russian Federation. In 2016, the Russian Federation signed the Paris Agreement, which included, among other, the development by 2020 of a strategy of socio-economic development with a low level of greenhouse gas emissions for the period until 2050.

Obviously, the climate agreement affects Russia’s prospects for fossil fuel exports (especially for coal exports, but natural gas exports might also be substantially affected by a further increase in emission reduction goals). Moreover, modeling shows that climate-related actions outside of Russia could cause Russia’s GDP growth rate to decline by about half of a percentage point. In addition, Russia faces the threat of market barriers for its exports of energy-intensive goods. Therefore, incentives to set ambitious national decarbonization targets are very low, especially assuming that these additional efforts would require significant investments, and would also require higher prices for energy, which is socially unacceptable.

This background explains why Russia has remained isolated from the global decarbonization trend for many years. Its participation in international environmental cooperation has always been determined primarily by external policy objectives. Russia signed the Paris Agreement in 2016, with voluntary obligations to limit anthropogenic GHG emissions to 70–75% of 1990 emissions by 2030, provided that the role of forests is taken into account as much as possible.  The Paris agreement was ratified in 2019. Under the Paris agreement, which allowed countries to set their own targets, Russia pledged to reduce emissions to 25 to 30 per cent below 1990 levels by 2030.  As of 2017, Russia's emissions were 32 per cent lower than in 1990. Thus it can actually pollute more and still meet its current Paris agreement goals. Emission reduction policies will affect fossil fuels prices and Russia, may face a substantial reduction in energy exports. It is estimated that the policy that aims at cutting 80% of GHG emissions in the European Union can lead to almost a 75% reduction in Russia’s natural gas exports to Europe by 2050 relative to the no climate policy scenario. For Russia, it is critically important to get ready to mitigate the risks associated with the Paris Agreement by adjusting itself to the new energy landscape. Diversification of the economy is the major response. The development of a full-scale strategy of adaptation of the Russian economy to a low-carbon future should be accelerated by Russian industrial, academic, and government experts. The objective for this strategy should be broader than just the planning of low carbon development. In addition to the plans to support low-carbon technologies that are most relevant to the Russian market and to introduce new regulations and legislative incentives to promote low-carbon development (including emissions disclosure requirements and carbon pricing scheme), the strategy should find ways to address three types of risks: risks of reducing energy exports, risks of additional market barriers to Russian exporters of energy-intensive goods, and risks of relying on outdated energy technologies. The post-Paris energy landscape poses a challenge for Russia to gradually change the model of its economic development, launch the process of diversification of the economy, and elaborate the new comprehensive development strategy identifying its new position in the world economy. The current way of fossil export based development will be difficult to sustain in the coming decades, regardless of Russia’s own climate policy choices.

Technology policy

While failing to give serious attention to climate policy, Russia is at the same time very sensitive to technology policy. The country’s leadership realizes that Russia clearly faces the risk of falling behind in developing new energy technologies that will become standard throughout the world. 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, energy transition technologies are definitely not the main focus of Russian technology policy: in the key state document defining priorities in this area—the state program “Energy Development” 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 said concerning low-carbon technologies.

The climate agenda is not relevant in Russia, while the competitiveness of the national economy and energy security are already provided by abundant cheap hydrocarbons (primarily natural gas). Thus, for Russia, technology policy and a desire to prevent the emergence of a large technology gap are the only truly important drivers of the energy transition. Decarbonization and, in part, decentralization are currently unacceptable to the country’s leadership and major stakeholders.

The Russian government should first determine the long-term role of renewables in its energy balance, which is quite difficult to do without a decarbonization agenda: as the country with the world’s largest natural gas reserves and the second largest reserves of thermal coal, Russia does not see real value in a transition from fossil fuels to zero-carbon energy sources. Despite the country’s massive potential in wind and solar resources and the virtually limitless land available for development, the availability of oil, gas, and coal is suppressing the development of clean energy. Diversifying this energy mix towards carbon-free energy sources is a challenging task: low prices for hydrocarbons and the unfavorable geographical dispersal of potential renewable resources from the point of their utilization (mainly concentrated in unpopulated areas with a long distance to the center of consumption), together with their comparatively high cost (e.g. low demand for new renewable capacity and high requirements for localization, resulting in high, uncompetitive per-unit cost) hinder the development of these energy sources in Russia.

Conclusion: A new strategy is needed in order to adapt to the energy transition

Russia’s attitude towards the energy transition is quite controversial: trying to introduce in a traditional centralized manner some components of this trend. First, with regard to new technologies, the country is essentially refusing to accept the main driver of the trend—the decarbonization agenda. Existing strategic documents (primarily a draft version of the “Russian Energy Strategy Up to 2035”, which was submitted to the government by the Energy Ministry in 2015, but not approved until now do not take the energy transition into account. Nevertheless, at a certain point, the country will have to develop a long-term vision for both its domestic energy market development and its export strategy in order to adapt to the profound transformation of the global energy system

Note

In 2018, 30% of  the EU's crude oil imports, 40% of natural gas, and 42% of solid fuel (mostly coal) originated from Russia. Russia continues to be the main supplier of gas to Europe. Russia is the dominant gas supplier for a number of EU countries . Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Poland, Romania, and Slovakia each receive between 75 and 100 percent of their natural gas imports from Russia. Six of these countries also get more than 50 percent of their oil imports from Russia. Moreover, Russia’s importance as a strategic supplier for Germany is increasing as a consequence of the German government’s 2011 decision to remove nuclear energy from its energy mix. The electricity baseload previously generated by nuclear power plants, currently provided by lignite-fired plants, is expected to be replaced by natural gas imported from Russia. Russia has a 40.6 percent share of natural gas imports to the EU and is the cheapest supplier, so there are few incentives for buyers to replace it with another source. Germany, Italy, or France, can exercise their market power and obtain discounts and guarantees from Russia directly.