TOWARDS AN EU-RUSSIA DIALOGUE ON ENERGY (ELECTRCITY)

The  mutual benefits of EU-Russia energy cooperation and cross-border energy investments are undeniable. It is important to reflect on the creation of institutional structures that would enable the EU and Russia to rebuild trust by working together in a field of common strategic interest. The establishment of an EU-Russian energy agreement could serve to overcome the current misunderstandings that exist between the EU and Russia in respect of the interpretation and application of the main concepts of energy law. The legal certainty resulting from such an energy-specific agreement could contribute to improving the investment climate for cross-border EU-Russian energy investments and possibly, through closer investment ties, enhancing trust between the EU and Russia

The next 20-25 years will see a rapid evolution in the global electricity sector: electricity demand will grow twice as fast as the average of other energy types. This will require significant investments in infrastructure, energy efficiency and energy savings. Most scenarios for the EU energy system show electricity playing a much greater role than now (almost doubling its share in final energy demand to 36-39% by 2050 in the EU decarbonisation scenarios), particularly after 2030. This means a steady increase in overall electricity consumption and an increasing share of electricity from renewable sources. Final demand for electricity should increase as part of growing energy demand in the current policies scenarios. In decarbonisation scenarios, electrification provides an important means of decarbonisation of transport and heating/cooling sectors. Electricity could also provide around 65% of the energy demand of passenger cars and light duty vehicles. This development will inter alia necessitate increased cooperation and trade with neighbouring countries to jointly exploit renewable energy resources more cost-efficiently.

EU energy systems are in the early phase of a major transition in electricity. Significant investments are needed to replace the EU's ageing network and generation systems, decarbonise electricity generation and make it more energy-efficient. Investments are taking place, but they must be stepped up. To this end, the EU plans to encourage the further development of well-functioning, crossborder, wholesale markets; to promote demand response, including the roll out of smart grids and meters and the development of demand response services; and to promote the integration of storage and flexible generation to address the changes of decarbonisation. The internal energy market is crucial for the EU to make the transition. If properly designed, markets can promote and accompany the system change and effectively promote the most efficient solutions.

In Russia, electricity is also expected to play an increasing role in the future energy mix. According to IEA, Russian electricity consumption is expected to increase by nearly 2%/year, and will overtake EU per capita consumption by 2017. The strategic objectives for the Russian electricity industry include the modernisation of the existing generation capacities and the development and implementation of capacities based on new generating technologies, including an accelerated development of renewable and nuclear capacities. Russia also plans the reinforcement of the Unified Power System (UPS) of Russia and its interconnections with neighboring countries. Further efforts are foreseen to strengthen the reliability and security of the system and to improve the organizational and market structure of electricity sector through the elaboration and the implementation of stable and clear rules for electricity and capacity markets' participants. The development of modern heating systems on the basis of combined heating/generation will be a specific challenge, using the potential of renewable energy resources. Nuclear energy currently provides an important share of the electricity generation both in Russia and the EU, despite big differences between EU Member States. While Russia plans to increase the share of nuclear in its energy mix and to replace its older nuclear plants, the key question in the EU is whether the existing nuclear plants will be replaced by new nuclear plants or by other energy sources at the end of their lifetime. In any case, for both the EU and Russia, it remains essential to ensure the highest international standards of nuclear safety and security. The fuel mix used for production of electricity will remain under the sovereign responsibility of Russia and the EU Member States respectively. Irrespective of the choices made, both sides have a joint interest to apply to the highest environmental and safety standards, including as regards the implementation of the relevant international conventions. Today, the EU and Russia power systems are strongly interlinked. The Russian electricity exclave, the Kaliningrad power system, has no direct links with the main grid of UPS of Russia, being interconnected only with Lithuanian power system. The power systems of Estonia, Latvia and Lithuania are synchronously interconnected with the power systems of the Russian Federation and the Republic of Belarus but have very limited interconnections with the power systems in the rest of Europe. New interconnectors in the Baltic Sea region will be built (Estlink- 2, LitPollink and NordBalt) between the Baltic States and the EU electricity markets which will allow increasing and diversifying regional electricity trade. The negotiations over an agreement between the Russian Federation, the Republic of Belarus and the European Union on the Coordinated Operation of the Unified Power System of the Russian Federation and the Power Systems of the Republic of Belarus, the Republic of Estonia, the Republic of Latvia and the Republic of Lithuania are progressing.

Cooperation pathway

The main drivers for future cooperation should be the need to ensure the reliability of power supply, the optimisation of the operation of the EU and Russian power systems, optimal grid management, and promoting investments in clean and flexible power generation on the base of clear and stable rules. This in turn will require close cooperation on technology and regulatory issues. Consumers will have a major role to play in modernising electricity markets. Energy efficiency labelling of appliances is a good example of a policy tool that facilitates consumer choice and behaviour. Large industrial consumers already today adapt their consumption based on market signals. In future, smart metering and smart grids will also allow small consumers to have an active consumer-supplier role. This profound revolution in electricity markets over the coming decades will provide a new field for cooperation between Russia and the EU. In the context of the moves towards the decarbonisation of the energy systems, carbon capture and storage is likely to play very important role for coal-fired and oil-fired electricity generating capacity and, in the medium to longer term, also for gas-fired capacity. Demonstrating carbon capture and storage, and exchanges on how to reduce greenhouse gas emission in general through new technologies and market signals should therefore be an item for further EU-Russia cooperation. The investment in combined heating/cooling plants and the modernisation of the power sector more generally is an important challenge both in the European Union and the Russian Federation. Cooperation in this area should include the promotion of joint projects and exchanges on regulatory best practices and reforms. There is a significant potential to increase electricity trade between both sides. Electricity exchanges between the Russian Federation and the EU are forecast to increase over the coming years. This calls for both Parties to investigate further market evolutions and infrastructure developments needs.

A first necessary step is to make necessary provisions aimed at ensuring the reliable and predictable functioning of power systems, and improving cooperation at a technical level. Within the Energy Dialogue, contacts and cooperation between the System operators, the regulators and the industry associations should be stimulated and reinforced.

Recommendations, actions and milestones.

Before 2020:

• Make necessary provisions aimed at ensuring the reliable and predictable functioning of the EU - Russia interconnected power systems; investigate further market evolutions and infrastructure development needs, notably as regards cross-border exchanges; develop working mechanisms for the identification and joint promotion of mutually beneficial crossborder infrastructure projects;
• Elaborate forward-looking scenarios for the integration of the power systems on the way to a pan-European energy space; implement joint assessment of the EU – Russia cross-border network infrastructure, analysis of options to improve this infrastructure and promotion of best options, especially in the Baltic sea region, and a continuous exchange of information on the respective development of EU and Russian grid infrastructure and its modernisation, including on smart grids
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  Technical cooperation:

   - Working arrangement between ENTSO-E and the Russian System Operator and Federal Grid Company on the base of corresponding agreement(s);

  - Cooperation of regulatory and infrastructure organisations with the aim of elaborating and introducing technological, economic and legal mechanisms regarding the development of cross-border trade between the EU and Russia's energy systems;

  - Establishing a platform for interaction involving the Federal Tariff Service of Russia and EU regulatory bodies, including ACER, on urgent regulatory and market design issues; approximation of legislation, optimal development of market relations, reliability of power supply and favourable conditions for investments and power development, including discussion on pricing policies and policies to support generation;

  - Sharing best practices across the whole range of regulatory cooperation including dedicated events such as annual EU-Russian regulatory conferences as well as targeted workshops.

• Joint actions to support the development of electricity from renewables in Russia and the modalities for increased trade in renewables between EU and Russia, and the possibility to establish joint projects in this area;
• Work towards mutually beneficial and non-discriminatory treatment of market participants and access to markets for both sides (where applicable).
• Establishment of an EU-Russia cooperation platform or centre for sustainable development of a transcontinental energy system, serving as a cooperation platform and promoting the implementation of innovations (renewable energy, energy-efficiency, balanced approach towards the perspective development of future power system, smart grids, future transmission grids, carbon capture and storage, etc…)

Up to 2030

• Joint elaboration of a programme for the coupling of power systems and strengthening of interaction between the markets;
• Coordination of EU and Russian strategies in the electricity sector, including on large investment projects of mutual interest and the step-by-step development of electricity trade based on renewable and clean energies;
• Implementation, on the basis of a common platform or centre, of joint projects, including on grid modernisation, renewables and new technologies;
• Increase cooperation on modern electricity technologies and systems, including smart grids;
• Roadmap for solving EU and RF power systems/markets interaction problems (power and capacity markets) with the objective of moving towards a subcontinent wide interconnected electricity system and market;
• Revision and confirmation of targets up to 2050 depending on the results already achieved.

Up to 2050

• Establish a common energy space (power systems and markets coupling), including harmonised minimum rules on third party access; harmonised regulations based on competitive markets and a level playing field;
• Further cooperation on innovation in generating and transmission equipment to increase its efficiency and environmental sustainability;
• Increased cooperation concerning the management and operational control of power systems, increasing their adaptability against accidents, power cuts etc;
• Joint seminars, conferences (including international) on any electricity aspects at any stage according to mutually agreed programmes and priorities.