The contribution of development institutions into the market formation around prospective technologies is not always obvious. However, “Rusnano”, which extensively participated in the development of RES market and which implements hydrogen initiatives today, is an exception. Alisher Kalanov, Head of Rusnano Management Company’s Investment Division told to Vassily Savin, Partner, KPMG in the CIS, about the way the second RES support program is going to affect further development of renewable energy industry in the Russian Federation, how to decrease the impact of weather conditions on “green” electricity generation, about a unique chance to occupy an important niche in the global hydrogen market and about the interconnection between RES and the production of “green” hydrogen. 

As it is known, the second RES support program implies the decrease in financing and significant increase of localization and export requirements. It is expected that grid parity must be achieved in the end. In your view, how sufficient is this program for the support of renewable energy industry development in Russia?

The first program, which will be over in 2024, gave an opportunity to construct about 6 GW of new RES capacities. Taking into account current background and planned investment resources, the indicator of putting “green” generation into use will be approximately the same at the second stage – not less than 3.2 GW in wind generation sector and 1.7 GW in solar power sector, with the total of about 5 GW of new capacities in the space of 11 years. Judging by the example of wind generation sector, this will help to compete for about 300 MW of RES per year, which is less than the average annual volume of the first program, where about 500 MW per year were competed for. 

As for market quality, this is where competition is essential, because it drives the modernization of technologies and the development of new solutions. As part of competition the players struggle for the reduction of costs, which ultimately leads to the efficiency growth.

As a rule, the competition in RES sector is the result of market volumes and any reduction of this volume has a negative impact on the competition. It is also important to keep in my mind that the selection principles of the second program imply a sloping demand curve – the greater the competition at the selection stage is, the lower a single-rate RES price will be and the more capacities will be introduced.

As we feel it, the market quality will be determined during the first tender that will take place in August this year. Competition will take place for sure, but not between new and existing companies. The volumes of the second program will be competed for among the companies which proved themselves well during the first stage. After the August competition there will probably remain two players in each sector, in some sectors maybe even one. Further development of these sectors will directly depend on the strategy chosen by the winning companies.

Market size and export and localization rates are a restriction for the emerging of new system players in RES sector. By the way, another novelty has recently started operating. During the first program the volumes were competed for based on the threshold CAPEX, now it is done based on one-part tariff. This is the tender principle in the majority of countries today.

In terms of export the first supplies of RES components abroad mean that the industry has a significant export potential. It is necessary to seek to enter these markets, try to take hold of them, find one’s niche there, because without export the efficiency of the business model, typical of the players in the Russian market (which is not particularly capacious) will be far from high indicators.

Localization requirements are considerable. Governmental logic is clear – despite the small size of the market compared to the global indicators, all RES sectors should have a complete production chain with deep localization. It is planned that this process will be accompanied by the introduction of new technological solutions. For instance, by the capacity increase of wind turbines, which were used at the first stage, up to 5+ MW. 

Alisher Kalanov, Head of Rusnano Management Company’s Investment Division

If I understood you correctly, this means that this support volume will be enough for RES to start competing with conventional generation sources despite a slight decrease of the second program?

The volume of investment resource determines the volume of introduced capacities and those production facilities which will support the industrial element during the second program, providing new capacities with the equipment complying with localization criteria.

Talking about parity, it is the maturity of technologies that is in the foreground rather than the volume of support. It has a certain range for further development which suggest that at the end of 2030s we will overpass all road-forks related to parity. Though I do not call it grid parity but parity between levelized cost of RES electricity and conventional generation. By this time RES technological development will have reached the level which will enable “green” power industry to compete on an equal basis with traditional generation in terms of price. In my opinion this serves as the reason to limit the second support program in lifetime. The second program is the last one because by 2030-2035 the parities must be achieved, and the production of “green” electric power will be more efficient than the conventional types of generation.

It is not a secret that RES are characterized by the dependence on weather conditions which affect the stability of production. Are there any technical solutions which help either balance or reduce this impact onto green generation? Are there such solutions in Russia?

It is logical to highlight two components here. The first one is a changeable pattern of production which depends on natural factors. If insolation or wind are available, the generator is active and vice versa. Basically, there are solutions which help smooth RES production inequality. In the first instance it is different energy storage systems which are being extensively implemented. Apart from that, with the help of RES it is possible to produce “green” hydrogen which can be used as fuel to be supplied to end customers or supplied back for electricity generation, thus providing a balance between operational schedules of wind farms and solar power plants.

But there is another parameter which is critical for the market – it is the accuracy of production forecasting. Our analysis shows that in the countries which extensively develop RES, where operating rules of the wholesale market are similar to the Russian market and where there are energy markets for a day ahead, the accuracy of RES facilities forecasting reaches 96-97%, which is almost a maximum. 

So, there is no need for a special instrument to introduce “green” energy into the network infrastructure if we talk about a 10-15% range of RES share in the energy mix. This issue is actually about the efficiency of power system management and control methods.

We considered the experience of Danish and Chinese power systems and examined the work of a German market, which is characterized by a higher RES penetration level and where efficiency is achieved without extra technical solutions. The volume of the second RES support program, which is being discussed now, will help increase the share of green generation up to 2% in Russia’s energy mix. With such RES share special hedging and production balancing measures will simply be not required, while abroad a greater amount of electric energy flows into the common system without these measures.

What steps do Russian producers take to enter foreign markets? Are there any solutions which are in demand and, thereafter, are any state export incentives required?

During negotiations around the second RES support program the initial volume of financing was requested following the pattern of the renewable energy industry development in the countries which are leaders in this field. There about 65% of industrial potential is supplied onto domestic market, the rest 35% are exported. In Russia the proportion is inversed. The introduction of mandatory export requirements and the realities of Russian market resulted in the supplies of 35% of the industrial potential onto our domestic market, while the majority of 65% will be supplied abroad. 

Why does it happen so? The answer is plain to see. The total volume of the second program is 5 GW for 11 years. By simple division we calculate that this means the construction of not more than 450 MW of wind farms and solar power plants yearly. Is it much or not? The production capacity of RES components in Russia meets the market demand at the level of 1.7 GW per year, but the domestic market is over three times smaller. Thus, the prevailing share of sales must fall on foreign markets. Each company develops its own strategy in accordance with this logic. Some companies optimize costs, improve technologies to be competitive in external markets in terms of price and quality. Some enterprises invest into the share capital of RES projects abroad thus creating opportunities to sell their products. 

International market is very intensive and competitive. Do our exporters of RES components need state support tools?

They will definitely not hurt, let us put it this way. Support measures for producers can be different. It can be either subsidies or recovery of logistic expenses, or warranty cover of export-oriented companies. All mentioned mechanisms already exist, it is only necessary to facilitate their availability and efficient use by all players.

From the standpoint of the projects which imply investments outside the Russian Federation, it is also necessary to consider the reduction of funding costs as one will have to compete with really large international players there, whose technological solutions are not worse than ours, but the cost of capital is significantly lower.

They have an opportunity to cooperate with global vendors which offer reasonable prices because the vendors treat them as wholesale customers. So, to compete with them it is necessary to add a certain support element related to cheap financing.

Export is not a barrier. It was executed even under the first program. First of all, it is about solar power industry. And for the record, it was both, technologies and equipment and the capital for foreign projects that were exported. As for wind power industry, there are no cases of investments into foreign projects, but the first supplies of Russian-built blades to Europe last year show that the quality of domestic products is not worse than the quality of foreign analogs, but the price is competitive.

In other words, the export of RES-equipment from Russia is an actually existing practice which must be constantly improved, developed, intensified, its efficiency must be increased and all mechanisms for being competitive in the external market must be used. In the context of the trend for the world economy decarbonization the demand for green generation, along with the demand for the components, will only increase. The chance must be taken.

Vassily Savin, Partner, KPMG in the CIS

What is your assessment of the demand for Russian RES-components in terms of a price-quality parameter? And probably in what markets exactly do you expect them to be in demand in the first place?

If we talk about wind power industry, it is only components that can be considered, as in Russia there are no players which can supply a wind turbine which is completely localized in the Russian Federation. With solar power industry the situation is different, there are companies which produce a finished product, a photoelectric converter or a solar array which already represent generating equipment.

One can always talk about the price-quality ratio, but it is necessary to understand that the price is the result of market volumes. For economic reasons competing with western companies, which generate 3-5 GW of RES equipment per year, is harder when the domestic production is 10 times less. 

It is clear that the economy of such companies is more efficient compared to ours, that is why the price is a separate challenge for many Russian players striving to supply their solutions abroad.

Under the first RES support program the supplies showed that we are definitely not worse as long as quality is considered. Probably all the best available solar and wind technologies have been implemented in Russia. In solar industry it is both, a thin film and the technologies connected with poly- and single-crystal silicone, in wind industry it is geared and gearless machines. All technologies, which are necessary to build a consistent development model for the production of RES parts and components, do exist in Russia. But competing with foreign companies without special support measures will not be easy.

How can global trends, whether it is carbon border adjustment mechanism or the USA’s joining the Paris Agreement, affect RES development in Russia and globally?

For the companies, which consider EU countries as a target market for their products, some very important changes are taking place today. In the first place I mean the introduction of the carbon border adjustment mechanism, the so-called СВАМ. There are various estimates and forecasts in relation to the amount of funds which Russian exporters will have to pay, they range from 4 to 7 billion euro annually - almost 25% (more than EUR1 bn ) of which will be paid because of the consumption of power with a significant carbon footprint. This regulation will mainly affect such major export-oriented industries as oil and gas, chemical and metallurgical industries.

Russia’s largest companies can choose one of a number of options how to react to this tax. The easiest one is to do nothing, but in time they will have to pay it. The second option is to try to do nothing and challenge the legitimacy of the tax introduction. But the mechanism will likely to function in such a way, that first one will have to pay the tax and then prove the violation of WTO norms and rules in the court, that we treat our 1 kWh as green while our counterparties do not. One will have to pay anyway, but the question is when this money will be returned (if ever).

The necessity to pay taxes is inevitable so measures must be taken to reduce the tax amount. If one makes an assessment of the investment amount, which these companies could have spent onto the creation of new RES-based power generation facilities, the necessity to pay the tax might be reduced in the long term. Our analysts built a model according to which the construction of a captive power plant or a generator on the consumers side will give the exporters an adequate profit-making capacity for these projects if the price for one ton of СО2 is 45 euro.

Another efficient solution is an extensive RES introduction into the power system of Russia, the development of the market of direct contracts and green certificates, the availability of which may serve as an investment signal for the decisions to build new green generation facilities. All this infrastructure must be built to help our exporters respond to external challenges.

“Rusnano” project portfolio includes not only investments into the development of solar and wind power energy but also into storage solutions. The government of the Russian Federation is working out a program of hydrogen power development. Do “green” and other types of hydrogen attract the company’s interest? Can hydrogen become one of the most important components of RES development in the company’s strategy?

Rusnano, as a development institution, intensively studies prospective technologies which will emerge in the market in the near future. Our interest in renewable energy projects occurred a long time ago and was not accidental. In fact, the largest RES market players, both generating companies and component producers, were created with the help of “Rusnano”.

It does not mean that we are not interested in RES anymore. We will maintain our interest in new technologies, for example, in solar power, which will be in demand in the coming 5-7 years and will give completely different dynamics for the amount of inputs and the competitiveness with traditional power generation. In wind power generation we analyze the prospects and opportunities which are given by offshore wind power technologies as well as efficient medium-output retail solutions. Such solutions do exist – they are developed by our technological partner, a company called Vestas. 

Our vision of RES is wider than the frames of CSA programs because they imply a small market volume. There is a feeling that retail microgeneration has good prospects. We carefully study the offers which will help introduce most relevant solutions for this technological market in Russia, for example, flexible solar arrays. This is a very complicated market where it is important to be competitive in terms of business model creation, where there is almost no regulation and the business is a b2c-type, so the importance of customer service goes up. 

Alisher Kalanov, Head of Rusnano Management Company’s Investment Division

Besides, numerous analytical reports and existing market trends say that the construction of offshore wind generation facilities for the production of “green” hydrogen has an impressive prospective.

Electrochemical accumulators also represent a very relevant field. The volume of green generation is growing globally and the demand for storage systems goes up and will continue to do so. Our project team has already developed a lithium-ion accumulator which is nowadays being implemented by large companies. In the near future we will closely approach the market introduction of accumulators which are efficient in terms of technical parameters, capital and operational costs.

“Rusnano” pays much attention to the market of “green” hydrogen, the formation of which we are witnessing. Together with our partner, an international energy company, we launched a pilot project in Murmansk region to produce and export not less than 12 thousand tons of hydrogen by 2024 to EU countries.

We are intensively cooperating with several large potential clients in Europe and the companies which certify the carbon footprint of products. If you have a long-term contract, all the technologies that you use in the production process, must be “green”. Each shipment and shipload must be proved with such a certificate. We see that in the long term it will be exactly the green hydrogen generated with the use of RES, that will be in high demand.

In this context support measures, and not only Russian ones, are critical. We study the experience of the EU, where they created programs stimulating the setup of green hydrogen production outside Europe in order to further export or import it in the direction of the EU. These programs pay much attention to various projects, including pilot ones, and we have built an efficient communication with our European colleagues. Russia has a perfect opportunity not to simply occupy a share of the “green” hydrogen market, but be most actively involved in its formation, become the leader of the industry.

What is to be done for this? How far ahead of Russia are European countries in terms of the development of “green” hydrogen production technologies? What is the demand for it now and how is it going to change in the long run?

Unlike in RES industry, where in fact we were able to backdoor our way and to implement and localize solar and wind technologies for a small volume of market, with hydrogen segment we are on equal entry-level positions with other countries. But in order not to get behind we need to rapidly develop this new industry assessing our competitive advantages and making necessary decisions to occupy the significant share of the new market.

We align ourselves with two significant market factors. The first one is the current state of the European market which is aimed at the consumption of up to 10 million tons of hydrogen per year by 2030, and for the record, the hydrogen must possess minimal carbon footprint. Import may make about 5 million tons of this volume.

The second guideline is the Energy Strategy of Russia up to 2035 which implies the creation of the capacities which are able to produce and export not less than 2 million tons of hydrogen per year. Basically, 2030-2035 are in sight. Green hydrogen will become competitive in relation to other hydrogen types and EU countries will be aimed at using it.

The prospects of “green” hydrogen development throw us back to the issues of RES market volume and the necessity to construct significant “green” generation capacities. If we consider the production of at least half of those 2 million tons of green hydrogen, implied by the Energy Strategy, this will require 10-15 GW of new RES capacities. More than the two green generation support programs together!

The key technological solution here is the use of offshore wind generation for hydrogen electrolysis with its further sea transportation to the European market and we are studying the opportunity to localize such equipment for sea wind power in Russia.

The difficulties related to the transportation of hydrogen will inevitably arise. The production of materials will require the development of large-scale pipeline infrastructure which will result in heavy expenses. What solution option seems most efficient to you?

Yes, this is a brand-new industry and infrastructural expenses will be heavy, but this is a necessity. In such case various alternatives, which help reduce transportation costs, must be considered. It is probable that green generation facilities and electrolyzers near large ports will be built which will help provide further sea transportation. A very interesting issue is connected with this. It turns out that the use of a diesel water carrier can have a negative impact onto the carbon footprint of hydrogen. This is also a challenge which will require the development and the construction of low-carbon sea transport.

Another option, which is theoretically even more efficient, is the construction of large green generation facilities and electrolyzers near the existing pipeline infrastructure. According to different estimates, up to 20% of Russia’s gas pipeline system filling will be hydrogen in the long run. This issue requires a more careful review, but the availability of a significant gas pipeline infrastructure connected with the European consumers, is a huge competitive advantage. It is obvious that we must use it.

The situation for the development of hydrogen industry in Russia is unique. There is a market which creates the demand for the product, there is also an opportunity to produce it and have it produced by several companies at once. To meet the deadline, given by the Europeans, we need to pool efforts. There can’t be one company which will be able to create the whole infrastructure, what is needed is the right format of cooperation between business and state.

The model that would suit here is the model existing under RES support programs. But we do not need to rely on state subsidies, but rather try to create a process where business is developing new generation facilities, electrolysis, product manufacturing and is localizing the production of components. The infrastructure for hydrogen transportation can be developed though the mobilization of long-term loans for 40-50 years. 

How much money do you think will be involved? What is your assessment?

The construction of 10 GW of new RES facilities will require about 10 billion euro, the same amount of money will be needed to construct electrolyzers, create storage and transportation facilities for “green” hydrogen. Part of this sum must be invested by business by attracting project financing, but the majority, which is related to expensive infrastructure, may be financed by government in the form of long-term loans. In such event significant multiplier effects will be formed for the economy of the country, such as GDP and tax payments growth, new hi-tech jobs, localization of innovative technologies, the increase of export supplies, the reduction of СО2 emissions and many more.

Besides, technological development constantly speeds up. This leads to the fact that in hydrogen industry reaching competitive ability with other types of fuel will happen much earlier than estimated. A year and a half ago the analysts said that the price of a kilogram of hydrogen, produced with the use of offshore wind generation, would reach $1-1.5 by 2040, but today, with rapid development of electrolysis technologies and green generation, it is possible to talk about 2030. Most ambitious estimates are 2025-2027.

What does it mean? It means that we must get down to developing hydrogen infrastructure right now, from generation to transportation. This will take several years - at least 4 or 5. If we are not ready by 2025-2027, this niche will potentially be occupied by Middle Eastern countries which are now implementing large hydrogen projects with the state support. And entering the market afterwards might be much harder.

Alisher Kalanov, Head of Rusnano Management Company’s Investment Division, and Vassily Savin, Partner, KPMG in the CIS

What conditions are needed for the development of hydrogen industry in Russia?

To have comprehensive development of the industry it is necessary to create export-oriented hydrogen clusters, which unite RES generation, electrolysis, manufacturing, storage and transportation of hydrogen. Largest global companies dealing with “green” hydrogen production follow the same route.

The clusters must be formed on geographic basis to be located close to sales markets in countries of the EU and the Asia-Pacific region, which will help reduce the logistics distance. Our current task is to estimate the potential of various sites from the following point of view: what solar or wind capacities might be built there, what infrastructure might be required, what amount of hydrogen can be produced, how will it be transported and so on. 

The pilot project we are implementing now in Murmansk region is aimed at proving the efficiency of such business model of green hydrogen production in Russia and its export to the EU countries.

We identified 5 large export clusters for ourselves: in the South, in the North, in the North-West and also two clusters in the Far East, which can meet the demand for green hydrogen in Asia-Pacific countries. We communicate with several large corporations of this region and already see the demand for long-term supplies to Japan and South Korea. The Southern cluster has the potential from the point of view of the existing RES generating infrastructure. It is characterized by a rapid integration of wind power and solar power facilities as well as the potential for the development of new RES sites. The geography of supplies can be very widespread.

Nowadays the largest energy companies of Russia and the representatives of financial organizations formed a working group which offered to elaborate an integrated national program for the development of low-carbon hydrogen power industry in Russia. The initiative to develop the program was supported by the Russian Ministry of Energy, the Ministry of Industry and Trade of Russia and other key federal executive authorities. Now the technical inquiry to elaborate the initiative is being approved by the leading market players who showed their interest in hydrogen technologies. They are large banks which are already prepared to cooperate with us, as well as energy companies, equipment manufacturers and the companies working with industrial gases.

The next step is the search for suppliers and contractors in order to present a detailed national support program of low-carbon hydrogen power industry for the Government’s consideration by the end of the year.

You have mentioned several times that Europe is the leader for decarbonization. Germany supposed to reduce СО2-emissions by 55% by 2030, while the transition to carbon neutrality was planned for 2050. But young activists demanded to speed up the process by 65% by 2030. If we consider 2050 from Russia’s standpoint, how possible is it to reach carbon neutrality in our country by this time? What might the energy landscape of capacities look like taking into account the development of new hydrogen technologies, further development of solar and wind generation?

You know, I won’t be able to answer this question because the decisions-making will depend on the situation in Europe, which remains the key trade partner of the Russian Federation. If the carbonization trend limits our scope of interests, we will start changing for sure and will see a completely different development dynamics of RES and “green” technologies.

To my mind, changes are inevitable. The pursuit of zero-carbon will become an engine for the development of global economy, will be the reason for the change of our culture of consumption. The examples are not too far – today’s kids already know the answer to the question “what is better?”: an electric vehicle or a gasoline car, a coal station or a wind farm? Standing aside won’t do. Preventing climate change is a serious challenge for the whole planet, which will have to be solved by all humanity.

But the pace of the ongoing changes is a huge issue. Just remember how “green” generation was developing. When at the beginning of 2000s large companies announced their plans for the development of this field, they were looked upon with a bit of irony. Twenty years after the grid parity has been already achieved in the majority of developed countries, it will soon be achieved in Russia. If we have a look at the programs which were adopted in Europe at a country-wide level, we’ll see that they all we underestimated irrespective of their timeline, the actual volumes of RES inputs significantly exceeded the plan and the prices were much lower that the projected levels.

So, I won’t be surprised if, as the technologies develop, these hydrogen-related transitions will eventually occur earlier that it is currently planned. 

The Russian version of the interview is available here.