Prelude: a man, a map, a vision
On Christmas Eve 1920 a man stood on the stage of the Bolshoi Theater in Moscow facing a large audience. He wasn’t singing an aria or dancing a ballet solo. He was presenting the delegates of the Eighth Congress of the Soviets with the plan to electrify Russia. He spoke with great passion and conviction, pointing periodically to an oversized, brightly illuminated map affixed to the curtain behind him. The map portrayed in great detail what the country’s electricity system would look like a decade later. The speaker was Vladimir Ilyich Lenin.
He predicted: “If Russia is covered with a dense network of electric power stations and powerful technical installations, our communist economic development will become a model for a future socialist Europe and Asia.” This vision of the future elicited, according to Lenin’s Collected Works, “stormy and prolonged applause.” But the map itself conveyed far more than these words. In two ways. First, it was dotted with over 100 new power stations—7.7 gigawatts (GW) in all—that would increase Russia’s installed generating capacity more than twentyfold in just ten years. Second, illuminating the map so overwhelmed Moscow’s fragile electricity infrastructure that several neighborhoods experienced blackouts. The futuristic map—and its disruption of the local grid—highlighted Russia’s bold ambitions for the future as well as its rudimentary status quo.
Today: retire or renew?
Fast forward one hundred years, and Russia is embarking on another multi-year plan to modernize its electricity system. The reason is simple: many of Russia’s fossil-fueled power plants are outdated. More than half have been running for at least 35 years, and only about one quarter incorporate advanced technology. These aging assets will become increasingly unreliable and eventually inoperable. Over the next decade, they would have to be refurbished or replaced. Replacement would be expensive and tend to put upward pressure on power prices. The Russian government has therefore launched a modernization program for 2022–2035 that industry insiders call DPM2 (“DPM” is the transliterated Russian abbreviation for “capacity supply agreements”).
Vladimir Ilyich Lenin
DPM2 aims to overhaul 40 GW of existing coal- and gas-fired capacity, 16% of Russia’s total. A typical refurbishment project is the replacement of a boiler or turbine replacement. Plants are selected through auctions on the basis of purely economic criteria. Then the Energy Ministry picks a small number of projects that didn’t prevail in the auction but achieve regional policy objectives. Once overhauled, a plant will receive 16 years of capacity payments that secure its operator a guaranteed post-tax return on investment of around 14% (the return is tied to the yield of Russian government bonds). The first two auctions, for plants that will come back on online from 2022 to 2025, were held in April and September of 2019.
And the winner is…
Participation was high, with a total 445 projects submitted to the two 2019 auctions. The results were surprising. The government had anticipated that the first auction, for 9 GW of capacity, would involve investments of around RUB 420 billion, or USD 5.2 billion. Instead, the total investments of the winning bids amounted to just RUB 62 billion, or USD 0.8 billion. The results of the second auction, for 4 GW, were similar. Some industrial power customers griped that a 14% return was being lavished on operators for minor overhauls that many would’ve performed even without DPM2.
Vladimir Sklyar and Anastasia Tikhonova, equity analysts at VTB Capital in Moscow, disagree: “The government managed to deliver its goal of prolonging the lifetime of key assets … for 16 years, at 15% of the cost it had originally expected, and at 11% of the cost of new construction. It is thus in a position to deliver inexpensive electricity with high reliability.”
Modernize, decarbonize, or both?
The previous modernization program, DPM1, ran from 2008 to 2018. It involved the construction of 30 GW of technologically advanced combined-cycle gas turbines in return for ten years of guaranteed capacity payments. This highly efficient capacity was one of the main reasons most Russian power producers tangibly reduced their carbon intensity last decade, in some cases by 15% to 30%.
The first two DPM2 auctions, by contrast, have mostly chosen relatively inexpensive component replacements, which, according to Sklyar and Tikhonova, will yield just a 1% reduction in the plants’ aggregate carbon emissions. Two other Russian energy experts, Tatiana Mitrova and Vitaly Yermakov, express concern that DPM2 “freezes the status quo for the next couple of decades” by “replacing old, inefficient equipment with material of the same kind.” Nevertheless, six DPM2 auctions remain (the next is scheduled for June 2020 but could be delayed by corona). So there’s ample scope for the government, if it chooses, to use the program to modernize and decarbonize more aggressively.
Greener from the outside?
There’s not a lot of pressure—yet—for it to do so. Russia has 80 GW of zero-carbon generating capacity (50 GW of hydro, 30 GW of nuclear), more than the total installed capacity of countries like Turkey and Iran. This hefty share of hydro and nuclear is the main reason why the carbon content of Russia’s electricity—despite its many old fossil-fueled plants—is roughly equal to Denmark’s, lower than that of Germany and the United States, and around half that of Australia and Poland. Also, Russia ratified the Paris climate agreement in October 2019 and probably will meet its (admittedly modest) targets for 2030.
On the other hand, a heavy reliance on fossil fuel in industry gives Russia a GDP energy intensity that’s 50% higher than the U.S. figure and double that of leading European economies. If, as is expected, other countries begin to introduce carbon taxes on imports, Russia’s exports will face a competitive disadvantage unless its energy and industrial sectors become greener. Russia has plans to increase the share of primary energy demand met by wind and solar from 3.3% in 2017 to 4.5% in 2024. And, as stated, DPM2 still could be used as a decarbonization tool. But the primary reason for Russia to be more aggressive about decarbonization in the decades ahead will likely be external: the need to make its exports climate-friendlier to avoid carbon taxes. It remains to be seen when this phase of modernization will begin and what its pace will be.
Sources not hyperlinked
Jonathan Coopersmith. The electrification of Russia, 1880–1926. Ithaca: Cornell
University Press, 1992.
Alexey Khokhlov and Yury Melnikov. “Market liberalization and decarbonization of the Russian electricity industry: perpetuum pendulum.” The Oxford Institute for Energy
Studies (May 2018).
Vladimir Sklyar and Anastasia Tikhonova. Modernisation bulletin, vol. 1: Adam Smith and
government commission. VTB Capital (June 2019).
_____. Modernisation bulletin, vol. 2: Decarbonisation missed, maintenance capex to grow. VTB Capital (November 2019).
_____. Russian utilities. Modernisation handbook (final edition). VTB Capital (January