RUSTEC: Greening Europe's energy supply by developing Russia's renewable energy potential

Energy Policy 51 (2012) 618–629

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RUSTEC: Greening Europe’s energy supply by developing Russia’s renewable energy potential Anatole Boute n,1, Patrick Willems IFC Russia Renewable Energy Program (The World Bank Group), Russian Federation

H I G H L I G H T S c c c c c

Russia has a huge renewable energy potential in geographic proximity to the EU. This potential could help the EU decarbonize its electricity supply at least cost. EU–Russia green energy export is a win-win situation but lacks political attention. RUSTEC could be a short-term and cost-efficient complement to Desertec. RUSTEC would diversify EU energy imports/Russian exports and stimulate innovation.

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Article history: Received 4 July 2012 Accepted 1 September 2012 Available online 6 October 2012

The North-West of Russia is characterized by a large renewable energy resource base in geographic proximity to the EU. At the same time, EU Member States are bound by mandatory renewable energy targets which could prove to be costly to achieve in the current budgetary context and which often face strong local opposition. Directive 2009/28/EC on Renewable Energy makes it possible for Member States to achieve their targets by importing electricity produced from renewable energy sources from non-EU countries. So far, most attention has been on the Mediterranean Solar Plan or Desertec. An EU– Russia Renewable Energy Plan or RUSTEC – being based on onshore wind/biomass/hydro energy and on-land interconnection, rather than solar power and subsea lines – could present a cost-efficient and short-term complement to Desertec. This article examines the political, geopolitical, economic, social and legal challenges and opportunities of exporting ‘‘green’’ energy from Russia to the EU. It argues that EU–Russian cooperation in the renewable energy field would present a win-win situation: Member States could achieve their targets on the basis of Russia’s renewable energy potential, while Russia could begin to develop a national renewable energy industry without risking potential price increases for domestic consumers—a concern of great political sensitivity in Russia. & 2012 Elsevier Ltd. All rights reserved.

Keywords: EU–Russia energy relation Renewable energy Joint projects

1. Introduction Directive 2009/28/EC of 23 April 2009 on the Promotion of the Use of Energy from Renewable Sources establishes binding national renewable energy targets. The targets of the individual member states collectively coincide with Europe’s overall goal of a share of 20% energy from renewable sources by gross final consumption by 2020. National targets are based on Member States’ renewable energy potential weighted by their GDP and modulated in relation to their respective starting points. More developed economies will thus need to make additional efforts.

n Correspondence to: IFC Advisory Services, 36, Bld. 1, Bolshaya Molchanovka Str., Moscow 121069, Russian Federation. Tel.: þ 7 495 411 7555, þ 32 477 382089 (Mob.); fax: þ7 495 411 7556. E-mail address: [email protected] (A. Boute). 1 Also associated with the University of Aberdeen (Centre for Energy Law).

0301-4215/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.enpol.2012.09.001

Simultaneously, Directive 2009/28/EC introduces ‘‘flexibility measures’’ (also called ‘‘cooperation mechanisms’’) to allow these mandatory targets to be reached in the most cost efficient way. The rationale of these measures is comparable to the flexible mechanisms of the Kyoto Protocol: Member States with limited potential can achieve their obligations by making use of the large renewable energy resource base in other states. Member States can statistically transfer certain amounts of renewable energy between each other. They can also implement joint projects and joint support schemes. Moreover, Directive 2009/28/EC provides for the possibility of implementing ‘‘joint projects with third countries’’. In accordance with this mechanism, EU Member States can support the construction of renewable energy installations in non-EU countries. Electricity generated by these installations and ‘‘consumed’’ in the EU will count towards the national targets of the Member State concerned. Joint projects with third countries require the physical export to the EU of an amount of electricity

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hydropower can be further developed (V G Nikolaev et al., 2009; Wiser et al., 2011; International Finance Corporation (IFC), 2011; Minin and Dmitriev, 2007). The Russian electricity system is connected to the EU via Finland, Estonia and Latvia and hydropower plants in Russia already export electricity to Norway and Finland through direct connection lines. In addition, the North-West of Russia is sparsely inhabited thereby reducing the impact on the local population.4 In contrast to the Mediterranean region, the idea of developing Russia’s renewable energy potential to ‘‘green’’ Europe’s energy supply has not been the subject of particular attention from the EU institutions and member states. It is, mentioned in the recent Roadmap of EU–Russia Energy Cooperation for 2050 (Gerikh and Cleutinx, 2011). The International Energy Agency (2011) also refers to the idea in the World Energy Outlook 2011. Moreover, the European Commission (2011e) has recently announced in its Energy Roadmap 2050 that it will examine the ‘‘potential of renewable sources provided by countries like Russia and Ukraine (notably biomass)’’. However, to date, neither the European Commission nor individual Member States have developed a coherent strategy with Russia to exploit the large Russian renewable energy resources under the joint project mechanism of Directive 2009/28/EC. This article examines the potential for EU–Russian cooperation in the field of renewable energy. Section 2 introduces the renewable energy potential in the North-West of Russia, as identified by Russian scholars, the International Energy Agency (IEA) and EU (TACIS)-financed resource studies. Section 3 describes the existing interconnection capacity and electricity exchanges between Russia and the EU and briefly discusses plans for new interconnection capacity. Following this overview of the physical characteristics of renewable energy and electricity interconnection in the North-West of Russia, Section 4 examines the legal requirements for the implementation of joint projects with third countries under Directive 2009/28/EC and applies these requirements to joint projects with Russia. On the basis of an overview of the relevant political and economic literature on the cooperation mechanisms of Directive 2009/28/EC, Section 5 analyses the opportunities and challenges of a EU–Russia Renewable Energy Plan. Section 6 proposes short-term and long-term scenarios to ‘‘green’’ Europe’s energy supply by developing the Russian potential for renewable energy.

which equates to the power produced from renewable energy sources abroad. This mechanism thus only applies to countries with a large renewable energy resource base that can easily be interconnected to the EU. So far only Italy and Luxembourg have officially announced in their National Renewable Energy Action Plans (NREAPs) that they intend to make use of these flexibility measures, including joint projects with third countries (European Commission, 2011a; Klessmann, 2011). This initial reluctance can be explained by the fact that the development of renewable energy brings about important social and economic benefits at the national and local level (European Commission, 2012b; Kost et al., 2011). It creates employment, reduces local pollution and stimulates innovation. Moreover, developing a national renewable energy industry can open new export markets. On the other hand, the domestic development of renewable energy can face important barriers. Some Member States have only limited cost-competitive renewable energy potential. Moreover, the visual impact and noise of renewable energy installations can lead to strong local ‘‘not in my backyard’’ (NIMBY) opposition. In this context, the energy industry, together with EU and national policymakers, is looking beyond the borders of the EU for cost-efficient renewable energy opportunities in third countries, with a particular eye on the 2050 EU decarbonization objectives. In its latest Communication on Renewable Energy, the European Commission (2012a) ‘‘encourage[s] the development of renewable energy production in and with our neighboring countries (y)’’. Although not officially acknowledged in the NREAPs, one project has gained particular attention. This is the Mediterranean Solar Plan (MSP) to exploit the potential for solar energy of the Mediterranean region for export to Europe. This plan aims, in a first stage, to build 20 GW of power generation capacity from renewable energy technologies, mostly concentrated solar power, around the Mediterranean Sea by 2020 (Resources and Logistics, 2010). The ambitious vision of the Desertec Industrial Initiative (DII), backed by major industrial players, proposes to provide 15% of EU’s electricity needs with solar energy from the Middle East and Northern Africa (MENA) by 2050 (DII, 2012). The MSP is mentioned in Recital 39 of Directive 2009/28/EC. Moreover, the European Commission consistently refers in its external energy policy documents to the strategic importance of importing renewable energy from North Africa and the Mediterranean region (European Commission, 2008b, 2010b, 2011a, 2011c, 2011e, 2012a).2 The MSP, including Desertec and intra-EU initiatives such as the Helios project in Greece, is attractive because of the region’s high solar irradiance (Oettinger, 2012). However, electricity production from solar energy remains – at least in centralized large-scale installations – less competitive compared with alternative renewable energy technologies, such as onshore wind energy, hydropower and biomass (Fischedick et al., 2011; Jansen et al., 2010). Moreover, the submarine transmission lines necessary to export electricity produced from solar installations situated in the Sahara desert to the EU are expensive when compared to onshore transmission capacity.3 By contrast, the North-West of Russia is characterized by a particularly favorable and relatively cost-efficient renewable energy resource base: onshore wind patterns are comparable to offshore conditions in the North Sea; the forestry industry presents considerable potential for biomass; and small scale

Russia shows a large renewable energy resource base in geographic proximity to the EU (International Energy Agency, 2003). Studies have identified the North-West of Russia as a location with high potential for wind power generation, with capacity factors reaching approximately 40% (V G Nikolaev et al., 2010; Minin and Dmitriev, 2007; Starkov et al., 2000; International Energy Agency, 2003). In the Kola Peninsula (Murmansk region), excellent wind conditions give rise to an estimated economic potential for electricity generation from wind in the magnitude of 8.9 billion kWh/year (V G Nikolaev et al., 2010). Investors have put forward proposals to build large (200 MW) wind energy projects in the Kola Peninsula (Energy Forecasting Agency, 2011). However, in the absence of additional financial support, these projects are not yet considered to be financially viable (International Finance Corporation (IFC), 2011).

2 Germany and France are starting to implement this approach by signing cooperation agreements with Algeria and Morocco (Reiche, 2011; Dubessy, 2011). 3 Insulating underground lines leads to costs escalating nearly exponentially with voltage and thus capacity

4 It is important to highlight the interests of indigenous people (Saami) whose migratory way of life in the North of Russia and the Finnmark area of Norway might potentially be affected by the wind turbines and reinforced network infrastructure.

2. Renewable energy potential in Russia’s North-West

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Large wind energy projects in the Murmansk region face the challenging competition of existing power plants (e.g. nuclear) and a current surplus of capacity in the regional electricity system.5 Investments are thus unlikely to take place in the short term unless part of the electricity produced can be exported to the EU. In addition to wind, a large potential for biomass and biogas exists in the Northwestern region, especially around Arkhangelsk and its forestry industry. Estimates based on production from the forestry industry assume the availability of more than 30 million m3 of waste which would translate into 60 TWh of energy, only a very limited share of which is currently realised (IEA, 2011, referring to Gerasimov and Karjalainen, 2011). Moreover, hydropower generation could be further exploited (Minin, 2012). Additional production of 7.3 billion kWh/year is considered economically feasible (V G Nikolaev et al., 2010). A recent TACISfinanced study indicates that the economic potential for hydro and wind power in the Northwestern district would amount to 16.2 billion kWh/year (V G Nikolaev et al., 2010).

3.2. Interconnection reinforcement plans Two plans for increased interconnection between Russia and the ENTSO-E grid through Norway and Finland have already been proposed by INTER RAO UES and are being discussed with Statnett—the Norwegian TSO and Fingrid—the Finnish TSO. As illustrated in Fig. 1, the ‘‘Pechenga Power Bridge’’ project would link the Russian and Norwegian grid in the far North (Artemyev, 2011). This project is undergoing technical and economic assessment by Statnett, the Russian System Operator,6 and INTER RAO UES. Preliminary analysis suggests that an overhead transmission line adding around 130–200 MW interconnection capacity between Norway and Russia would be economically viable (Artemyev, 2011). An additional proposal, the ‘‘Karelian Power Bridge’’ project (Sortavala–Puhos 110 kV) would increase the interconnection capacity between the Russian and the Finnish grids by about 80–150 MW (Ivannikov, 2011).

4. RUSTEC as joint project under Directive 2009/28/EC: the legal requirements 3. EU–Russia interconnection capacity and network reinforcement plans 3.1. Existing interconnection The electricity systems of different regions of Russia (e.g. Murmansk Oblast’, Leningrad Oblast’ and Karelia) are interconnected with the network supervised by the European Network of Transmission System Operators for Electricity—ENTSO-E (see Fig. 1). The most northern transmission line between Russia and Norway (connecting the Borisgleb hydropower plant in the Murmansk Oblast’ with Kirkeness) has a voltage of 150 kV and a transport capacity of around 50 MW (Eurelectric-UCTE, 2007). Approximately 200 GWh was exported from Russia to Norway through this network in 2010. The Russian electricity system is ¨ a¨ interinterconnected to Finland via the 400 kV Vyborg—Yllikkal connection that has a capacity of 1000–1200 MW (EurelectricUCTE, 2007). Smaller 110 kV lines (Svetlogorsk hydropower plant – Imatra and Kaitakoski hydropower plant – Ivalo) are used for cross-border supply of hydropower from Russia to Finland (Baltrel, 2007). In 2011 a total of 9636 GWh was exported from Russia to Finland (INTER RAO UES, 2012). The Russian grid is also interconnected to Estonia, Latvia and Lithuania via 330 kV lines (Eurelectric-UCTE, 2007; Baltrel, 2007). The interconnection capacity between the Russian grid and Finland is already largely assigned to existing power plants and reserved for electricity exports to Europe by INTER RAO—the Russian state-owned company in charge of electricity exports from Russia (Fingrid, 2012). INTER RAO UES already exports part of the electricity produced by TGK-1—the regional electricity company controlled by Gazprom. On the other hand, the net transfer capacities from Russia to Latvia, Estonia and Lithuania indicate transmission capacity above what is currently exploited (ENTSO-E, 2010). The electricity produced from smaller renewable energy projects in the West of Russia, such as small hydropower plants or biomass-fueled power plants, could, to a certain extent, already be injected to the ENTSO-E grid without considerable investment in network capacity reinforcements. However, new interconnection capacity is needed to fully develop the large renewable energy resource base in the North-West of Russia. 5 Plans to supply the Shtokman field with electricity produced from renewable energy sources in the Murmansk region have been discussed but have not been pursued.

RUSTEC – inspired from the Desertec acronym – would consist in exporting electricity produced from renewable energy sources (RES-E) in Russia to the EU. This project would aim at facilitating EU Member States to achieve their national mandatory targets under Directive 2009/28/EC by developing the large renewable energy resource base in the North-West of Russia. In accordance with the joint project mechanism of Directive 2009/28/EC, Member States can count RES-E produced in third countries towards their national targets if the following conditions are fulfilled. The electricity must be consumed in the EU network (Section 4.1.); it must have been produced by new installations (Section 4.2.); a certain percentage of the electricity produced should be consumed locally (Section 4.3.); and the installations may not have benefited from operating support by the host country (Section 4.4.). Moreover, Directive 2009/28/EC establishes additional formal and procedural criteria: the third country must ‘‘acknowledge’’ renewable energy production (Section 4.5.) and Member States must notify the EU Commission (Section 4.6.). 4.1. ‘‘Consumption’’ in the EU Directive 2009/28/EC links cooperation with third countries under the joint project mechanism to the physical transfer of electricity to the EU. In contrast to cooperation schemes between Member States, joint projects with third countries do not consist of ‘‘purely ‘virtual’ trade arrangements’’ (European Commission, 2011b).7 The flexibility they provide is bound to strict conditions related to the ‘‘consumption’’ of electricity produced from renewable energy sources in the ‘‘Community grid’’. However, once electricity is injected to the network it is technically impossible to trace its origin and distinguish ‘‘grey’’ from ‘‘green’’ electricity. As proof of importation and ‘‘consumption’’ of green electricity, Directive 2009/28/EC requires the nomination of an ‘‘equivalent amount’’ of electricity to the green electricity (RES-E) claimed towards targets. To count the electricity produced from renewable energy sources in Russia towards 6 System Operator—Central Dispatching Administration of the Unified Electricity System. 7 The requirement of physical electricity export between third countries and the EU also distinguishes joint projects with third countries from the flexible mechanisms (Joint Implementation and Clean Development Mechanism) of the Kyoto Protocol. The latter mechanisms are based on the virtual transfer of greenhouse emission reductions from one country to another.

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Fig. 1. Existing interconnection capacity and network reinforcement plans. Sources: ENSTO-E grid map, /https://www.entsoe.eu/resources/grid-map/S, together with Artemyev (2011) and Ivannikov (2011).

national EU targets, the System Operator in Russia and the TSO in Finland or the Baltic states would thus have to firmly nominate an equivalent amount of electricity to allocated EU–Russia interconnection capacity. The nominated capacity and RES-E production by the joint project must refer to the same period of time. Moreover, an amount of electricity equivalent to the RES-E applied against target must have been firmly registered in the schedule of balance by the EU TSO. The implementation of joint projects with Russia would therefore require close cooperation between the EU network operators and the Russian System Operator. In addition, as electricity exports from Russia are de facto controlled by the state-owned company INTER RAO UES, joint projects in Russia would also require the involvement of this company. Directive 2009/28/EC does not require consumption of RES-E in the electricity system of the Member State that implements the joint project in a third country. The Directive limits the requirement to physical import to ‘‘the Community side of an interconnector’’. Norway is not part of the EU. Can the Norwegian grid nevertheless be considered as forming part of the ‘‘Community’’ grid? Based on the Agreement creating the European Economic Area (EEA), Norway has adopted and implemented the 2003/54/EC

Internal Electricity Market Directive and the 2001/77/EC Renewable Energy Directive.8 Moreover, Directive 2009/28/EC has recently been integrated into the EEA Agreement. According to Article 7 of the EEA Agreement, these Directives are now part of the internal Norwegian legal order. More specifically, Protocol 1 to the EEA Agreement provides that references in EU Directives to the territory of the ‘‘Community’’ shall for the purpose of the relevant Directives be understood to be references to the territories of the Contracting Parties, i.e. of Norway. The Norwegian grid can thus be considered as forming part of the ‘‘Community’’ grid for the purpose of the Renewable Energy and Internal Electricity Market Directives. In addition, Norway participates in ENTSO-E.

4.2. New installations The electricity must be produced by new installations, i.e. installations that have been constructed since 25 June 2009, 8 See Annex 4 to the EEA Agreement. Available from: http://www.efta.int/  / media/Documents/legal-texts/eea/the-eea-agreement/Annexes%20to%20the%20 Agreement/annex4.pdf.

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including increases in capacity of existing installations after that date. According to Recitals 37 and 38 of Directive 2009/28/EC, the rationale behind this requirement is to avoid the diversion of existing renewable energy sources to the Community and their replacement in the third country by conventional energy sources. The proportion of renewable energy sources in the fuel mix of the third country may not be reduced as a consequence of the implementation of a ‘‘joint project’’. As illustrated in Fig. 1, in the North-West of Russia, hydropower plants (e.g. the BorisGleb power plant) are already supplying electricity to Norway and Finland. These installations were commissioned before June 2009 and therefore cannot be used to achieve EU targets. The North-West of Russia is also home to a large number of outdated hydropower installations that have been mothballed. The Directive only refers to capacity increases for existing installations. It could however be argued that, given the fact that these installations are not currently in use, modernizing and recommissioning them could fulfill the requirement of Directive 2009/28/EC. Indeed, Article 9, para. 5(a) of Directive 2009/28/EC refers to ‘‘refurbished installations’’ in the context of the notification of joint projects with third countries to the EU Commission.

4.3. Domestic use The relevant third country should consume part of the RES-E produced from joint projects domestically and Member States should facilitate this domestic consumption. Moreover, Member States should encourage third countries to develop a renewable energy policy and adopt ambitious domestic renewable energy targets The EU has been involved in promoting the use of renewable energy sources in Russia, e.g. through TACIS.9 Member States are also active in this field through initiatives such as the Russian– German Energy Agency,10 the Russian–French Center for Energy Efficiency, and the Russian–Danish Energy Efficiency Center.11

4.4. Exclusivity of operating support The operating support by Member States of RES-E production in third countries must be exclusive. This means that the amount of RES-E produced and exported must not have benefited from a support scheme in the third country with the exception of investment aid. The objective of this exclusivity requirement for the provision of operating aid is to avoid overcompensating the concerned producers (European Commission, 2012b). Russia has undertaken initiatives to develop renewable energy support schemes (International Finance Corporation (IFC), 2011, 2012; Boute, 2011, Boute, 2012b). However, these mechanisms are not yet implemented in practice. Renewable energy installations could, in theory, benefit from the Joint Implementation (JI) scheme under the Kyoto Protocol (Government of the Russian Federation, 2011). However, the JI mechanism in Russia has promoted only few renewable energy projects (e.g. coal-tobiomass fuel switch in the heating sector and modernization of a hydropower plant) (Sberbank, 2012). Renewable energy investments in the Russian electricity sector thus, for the time being at least, do not receive domestic financial support. 9 See http://www.icfinternational.ru/english/projTACIS.asp on the TACIS project ‘‘Renewable Energy Policy and the Rehabilitation of Small Scale Hydropower Plants’’. 10 See http://www.rudea.org/. 11 See http://di.dk/English/rudanenergo/about/Pages/About.aspx.

4.5. Certification in the host country Directive 2009/28/EC does not explicitly require the certification of joint projects with third countries as renewable energy projects. It only requires a ‘‘written acknowledgment’’ by the host state that a certain amount of electricity has been produced from renewable energy sources during a specific period of time and that this amount of RES-E is to be regarded as counting towards the national target of a particular Member State. Moreover, the host state must ‘‘acknowledge’’ that part of the electricity produced from the joint project will be consumed domestically. In practice, to determine that electricity has been produced from renewable energy sources, the host state will have to certify these installations as renewable energy installations within the meaning of Directive 2009/28/EC. Russia has established a certification (qualification) procedure for renewable energy installations (Government of the Russian Federation, 2008a). The Ministry of Energy (2012) has highlighted the uncertainty that investors face under this procedure, in particular because installations can only be certified after having been connected to the grid and commissioned. The existing certification procedure aims to measure progress towards Russia’s national RES-E consumption targets. It does not, however, apply to the export of RES-E. To facilitate the certification of joint projects, Russia could thus adopt an independent certification procedure. In this respect, Member States will have to make sure that joint projects meet the definition of ‘‘energy from renewable source’’ in Article 2 of Directive 2009/28/EC before taking the amount of electricity produced by these installations into account for their national targets. 4.6. Notification to the EU Commission Member States must notify the EU Commission that they intend to cooperate with third countries under the joint project mechanism. This notification shall describe the proposed renewable energy installation and the amount of RES-E that this installation will produce and which will be counted towards the national target. It shall also include a ‘‘written acknowledgment’’ of renewable energy production by the third country, as described above. On an annual basis, Member States must notify the Commission of the total amount of electricity produced during that year from joint projects with third countries and the amount of electricity which is to count towards the national target. This yearly notification must demonstrate compliance with the interconnection nomination and dispatching requirements mentioned above.

5. Cost-effectiveness of EU–Russia cooperation in the renewable energy field: pros and cons This part reviews the literature on cooperation mechanisms, including the limited literature on joint projects with third countries. This literature review aims to provide an academic basis to assess the cost-effectiveness of joint projects with Russia. The objective of this analysis is not to determine ‘‘hard’’ measurements and put numbers on the costs and benefits of the RUSTEC project. It is rather to develop a theoretical framework that should, at a later stage, be further researched, e.g. with feasibility studies. This part examines the costs and benefits of RUSTEC both from the EU and Russian perspective. It takes, to some extent, into account the interests of the incumbent electricity and gas companies (as potential winners or losers in a RUSTEC scenario). However, this analysis does not fully reflect elements of political economy or inertia against reform that might jeopardize a clear win-win situation because of changes to the status quo.

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5.1. Literature review The literature on the cooperation mechanisms of Directive 2009/28/EC remains relatively limited and focuses on statistical transfers, joint support schemes and joint projects between Member States (Klessmann, 2009; Klessmann, et al., 2010; Calde´s, 2012). The mechanism of joint projects with third countries has not benefited from particular attention in academic research. Klessmann (2009) has identified the following criteria to assess the effectiveness, cost-effectiveness and public acceptability of joint projects in achieving national renewable energy targets. Joint projects should facilitate achievement of national renewable energy targets and avoid infringement procedures in cases where the targets are not met (Klessmann, et al., 2010). They should also create new market opportunities for renewable energy investors. An important criterion to assess the costeffectiveness of joint projects is the potential to develop ‘‘untapped low-cost RES potentials (y) which – compared to purely national target achievement – would potentially decrease the total costs of achieving the RES targets, and thus also limit the required amount of financial incentives’’ (Klessmann, 2009). Although Klessmann focuses on joint projects between Member States, these criteria are largely applicable to joint projects with third countries given the comparable approach—i.e. cooperation between states to achieve renewable energy targets in the most efficient way. One criterion missing from Klessmann’s list is the avoidance of local NIMBY opposition to wind energy and hydropower projects—an issue of increasing sensitivity in many Member States (Ecorys, 2008; Ragwitz et al., 2007a; Jobert et al., 2007). Moreover, the European Commission, 2012b considers that an advantage of joint projects with third countries is the diversification of energy supply. Importantly, the following analysis of the specific case of EU–Russia renewable energy cooperation highlights additional criteria to assess the benefits of joint projects with third countries: avoidance of the costs and carbon impacts of biomass transportation; improvement of relations with strategic energy partners; and the opening of new markets for the EU renewable energy industry. In their assessment of cooperation between The Netherlands and third countries to achieve the Dutch renewable energy target, Jansen et al. (2010) point out different risks and indirect costs that can reduce potential efficiency gains of joint projects. First, Member States must consider the administrative costs related to the approval and financing of joint projects, as well as the costs of necessary interconnection reinforcement (Jansen et al. (2010)). Joint projects with third countries involve relatively important administrative costs due to the involvement of at least three parties in the approval of the joint project itself and of the required interconnection capacity – i.e. the Member States concerned, the host state and the EU Commission. Efficiency gains must also be counterbalanced with the risk of contract breaches by the host state and other risks of public interference (e.g. expropriation) with renewable energy investments (Jansen et al. (2010)). A study on the opportunity for joint projects in the Energy Community concludes that the cost advantage of these projects might be ‘‘off-set by the potentially higher cost of capital because of the less developed, higher risk renewable energy environments (compared with Western Europe)’’ (IPA Energy and Water Economics, 2010). According to Klessmann (2009) and Klessmann et al. (2010), political criteria to assess the public acceptability of joint projects in host countries are increased security of supply, environmental benefits, local job creation and GHG emission reduction benefits for the host country. In addition, the European Commission, 2012b highlights that joint projects can help host countries to

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increase their export revenues, enter a new market for renewable energy and access new sources of investments to modernize their energy infrastructure. The security of supply argument invoked by Klessmann is less relevant for joint projects with third countries. Indeed, in contrast to joint projects between Member States, joint projects with third countries require the physical export of an amount of electricity equivalent to the production from renewable energy sources. Local costs and disadvantages for the host country are system integration costs, including grid reinforcement and connection costs, the ‘‘sell-out’’ of low-cost renewable energy potentials, and possible local NIMBY opposition (Klessmann, 2009; Klessmann, et al., 2010).12 Here also, the specific case of EU–Russia renewable energy cooperation highlights additional criteria to assess the acceptability for host countries of joint projects: stimulating the development of a domestic renewable energy industry; facilitating national RES-E consumption; and ‘‘greening’’ the image of the third country on the international scene. 5.2. Pros and cons for the EU 5.2.1. Large resource base and low local opposition in meeting national targets Russia’s large renewable energy resource base holds the potential to significantly contribute towards the renewable energy targets defined in Directive 2009/28/EC. Given excellent wind conditions in the North-West (in particular in the Kola Peninsula), onshore wind projects could, in theory, be developed in a cost-effective way. In the EU, comparable wind factors are generally only found offshore. Offshore installations are however characterized by much higher capital and operating costs due to less mature technologies, more complex logistics and more expensive equipment (Fischedick et al., 2011). Wind power in the North-West of Russia allows the combination of the low-cost structure of onshore projects with the more attractive wind forces that characterize offshore projects. Onshore construction and proven technology could allow for relatively effective and efficient contributions to the EU renewable energy targets. Developing onshore wind energy installations in the sparsely populated North-West of Russia would also allow project developers to avoid the transaction (including administrative proceedings and litigation) costs associated with local opposition to wind turbines. On the other hand, these efficiency advantages need to be counterbalanced by the contractual, regulatory and political risks of investing in Russia (as identified below) and the general difficulties of project implementation in Russia, as illustrated by investors’ experience with GHG emission reduction projects (Korppoo, 2005). Moreover, efficiency gains of joint projects in Russia need to reflect the administrative costs of obtaining approval for these projects both in Russia and the EU, as well as the costs of connection to the electricity network – a particularly sensitive issue in Russia – and the interconnection reinforcement costs. Importantly, wind energy investments in the North-West of Russia and network reinforcements will have to safeguard the interests of indigenous people living in the region, in particular the migratory way of life of the Saami. 5.2.2. Avoiding the costs and carbon impact of biomass transportation Russia’s large biomass potential can contribute to achieving the EU renewable energy targets (IEA, 2011). This can first be 12 Jansen et al. (2010) limit their analysis of joint projects with third countries to the perspective of the Dutch government. They do not explicitly cover the public acceptability of these projects in the host countries.

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done by exporting biomass as primary energy fuel for RES-E production in the EU. The electricity produced by large (‘‘mega’’) biomass-fueled power plants counts as ‘‘renewable energy’’ and can therefore be taken into account to attain the national mandatory targets (European Commission, 2011a). Russian and EU companies already actively cooperate in this field. Russia, and in particular the North-West of Russia, accounts for a significant part of the total amount of wood pellets imported into the EU (REN21, 2012) and new large pellet plants are planned (Hewitt, 2011). However, the transport of biomass to the EU generates GHG emissions (Bates and Henry, 2009) and is costly. A climate-friendly and cost-efficient alternative to the export of the biomass resource from Russia to the EU, is the export of electricity produced from biomass in Russia to the EU network.13 Joint projects under Directive 2009/28/EC could enable Member States to contribute to a greener electricity supply (and achieve their target) without having to transport biomass to the EU. This would enable Member States to save the costs and GHG emissions associated with the transportation of biomass (e.g. wood pellets) from Russia to the EU. 5.2.3. Opening a new market for renewable energy technologies Given its considerable potential for renewable energy and the size of its electricity sector – the fourth largest in the world – (Troika, 2012), Russia presents interesting market opportunities for EU electricity and renewable energy equipment companies. By helping to harness this potential, EU Member States could open new markets for their national renewable energy industry. Commercial interests are not new to external EU climate change policy. The EU Commission and national governments promote clean energy initiatives abroad in order to stimulate the realization of business (export) opportunities for the EU energy efficiency and renewable energy manufacturing industry (European Commission, 2005; Wurzel and Connelly, 2011; Dai and Diao, 2011). According to the EU Commission, external energy efficiency and renewable energy policies could play a part in ‘‘consolidating the European industry’s role as world leader in this field and could contribute to boosting Europe’s competitive edge in the energy sector’’ (European Commission, 2005). Russia’s renewable energy market potential will have to be developed in cooperation with Russian partners. The Ministry of Energy (2012) has recently proposed local content requirements for renewable energy projects in Russia in order to stimulate the development of a Russian domestic renewable energy industry. This could limit market opportunities for EU exports and expose the EU to the risk of inefficient domestic technology. 5.2.4. Improving cooperation with Russia According to the European Commission’s Energy Roadmap 2050, ‘‘integrated strategies with current suppliers need to address benefits of cooperation in other areas such as renewable energies, energy efficiency and other low-carbon technologies. The EU should use this opportunity to strengthen its cooperation with its international partners (y)’’ (European Commission, 2011e). Cooperation in the field of renewable energy provides an opportunity for the EU to work with Russia on issues which are less strategically sensitive than traditional upstream energy projects. This could contribute to improving the mutual trust and 13 To avoid the transportation costs and carbon impact of biomass exports it may also be possible to export ‘‘green’’ gas from Russia to the EU. The Dutch gas pipeline company Gasunie, in cooperation with Gazprom, is working on the development of biogas projects in Russia for export to the EU (Gasunie, 2011). However, the joint project mechanism of Directive 2009/28/EC is currently limited to exports of electricity – and not gas – produced from renewable energy sources. This limits the possibility of EU financing for such projects.

understanding between the EU and Russian partners (Boute, 2012a). On a bilateral basis, this cooperation could enable the creation of privileged relations. Handke and de Jong have argued, for instance, that ‘‘negotiations on energy efficiency and the desire to move towards a low-carbon economy might help to create an energy-related agreement. (y) In the long term, helping to enhance Russia’s energy efficiency may be an effective way to improve relations’’ (Handke and de Jong, 2007). The promotion of renewable energy is already an important part of the EU–Russia Energy Dialog (Mikhaylov, Borak and Donnelly, 2010).14 However, the contribution of EU-Russian initiatives to the development of renewable energy has been limited because of the lack of direct EU financial support for renewable energy projects in Russia. The joint project mechanism under Directive 2009/28/EC provides an EU financing opportunity to implement this geopolitical agenda. 5.2.5. Limited employment and local economic benefits A disadvantage of joint projects with Russia may be that the EU and its Member States may not fully benefit from the economic and employment opportunities which renewable energy policies may offer. These benefits are often felt at the regional and local level (Recital 3 Directive 2009/28/EC; European Commission, 2008b; Ragwitz et al., 2007a, 2007b; RenewableUK, 2011). Under the joint project mechanism, EU Member States will finance renewable energy projects in Russia without directly creating local jobs in the local renewable energy industry (e.g., operation and maintenance of the turbines). The loss of potential for local economic development and employment must be counterbalanced with cost reductions (i.e. in the amount of financial incentives) which the import of green electricity from Russia would represent in comparison to purely national target achievement. Moreover, this equation needs to take into account revenues and employment benefits generated by the export of renewable energy equipment/know-how to Russia. 5.2.6. Energy security risks Reinforcing the electricity interconnection capacity with Russia could be opposed for reasons of security of supply related to Europe’s dependency on Russian energy. In Finland, comparable arguments have, for instance, been invoked to oppose electricity interconnection plans with Russia (Lappalainen, 2007). These arguments are increasingly sensitive given the background of recent interruptions of gas supply through Ukraine. On the other hand, the promotion of RES-E, including through joint projects with third countries, is part of the EU energy security strategy to diversify energy supply. According to the EU Commission (2012b), even if the energy is still imported, the diversification in the types of energy imported would contribute to improving EU energy security. By importing RES-E from Russia, the EU would thus, to a certain extent, diversify its dependency on Russian energy sources. Moreover, electricity cannot easily be stored and therefore does not face the same interruption risks as gas or oil supply (Lilliestam and Ellenbeck, 2011). Even if an interruption would occur, the damage on the European economy would be limited. The EU would already have the necessary backup capacity in place to compensate for fluctuations of production due to the variability of wind. It will therefore be possible to avoid disturbance in the electricity system. In addition, the import of electricity from Russia to the EU grid does not involve transit countries. There is thus no risk of interruption due to conflicts 14 Moreover, cooperation in the field of renewable energy would coincide with the stated objectives of the EU–Russia Partnership on Modernization (Council of the European Union, 2010).

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between Russia and transit countries, as was the case with the Ukraine–Russia gas interruptions. 5.2.7. Investment security The instability and unpredictability of the Russian investment climate (World Economic Forum, 2009) negatively affects the business case of renewable energy projects in Russia (International Finance Corporation (IFC), 2011). In this context, premiums corresponding to contractual and regulatory risks, as well as risks of government interference with renewable energy investments,15 raise the cost of capital necessary to finance these projects (Deutsche Bank Climate Change Advisors, 2009; de Jager and Rathmann, 2008). These risk premiums might to some extent be limited by signing investment agreements with the Russian government or by insuring the power purchase agreements (PPA), e.g. under the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group. Moreover, joint projects can benefit from protection against illegitimate government interference under the bilateral investment treaties that Russia signed with EU Member States (see Rubins and Nazarov, 2008). Protection under the Energy Charter Treaty is not possible for new investments in Russia following Russia’s decision not to ratify this treaty.16 5.2.8. Interconnection reinforcement costs Although Directive 2009/28/EC encourages Member States to develop transmission capacity to facilitate cross-border exchanges of RES-E, building the necessary interconnection lines between Russia and the EU remains a major financial and administrative challenge. It would require considerable capital and involve relatively onerous approval procedures in each of the various participating states. However, as mentioned above, on-land transmission lines – required for EU–Russia electricity exchanges – are characterized by lower costs than submarine network infrastructure – required for Desertec. 5.3. Pros and cons for Russia 5.3.1. Developing a national renewable energy industry Russia has recognized the importance of renewable energy for the modernization of its economy (President of the Russian Federation, 2009; Government of the Russian Federation, 2008b, 2009a, 2009b, 2010a; Sechin, 2011). The Concept for Long-Term Social and Economic Development to 2020 expects Russia to achieve ‘‘a leading position in the development of renewable energy sources’’ (Government of the Russian Federation, 2008b). The government has adopted a target of 4.5% RES-E by 2020 (Government of the Russian Federation, 2009a). Developing a national renewable energy industry is part of Russia’s strategy for innovation and diversification of the economy. However, as introduced above, the government has yet failed to create a functioning renewable energy support scheme in the electricity sector. Russia’s reluctance to effectively support renewable energy can primarily be explained by government’s fear of increased end-user energy prices (IEA, 2011; International Finance Corporation (IFC), 2011).17 As illustrated by recent high-level 15 An additional potential risk is that Russia could decide to account the renewable energy sold to the EU against its domestic 4.5% national target after that electricity had been paid and consumed. 16 Rasporiazhenie Pravitel’stva RF ‘‘O namerenii Rossiiskoi Federatsii ne stanovit’sia uchastnikom Dogovora k Energeticheskoi khartii, a takzhe Protokola k Energeticheskoi khartii po voprosam energeticheskoi effektivnosti i sootvetstvuiushchim ekologicheskim aspektam’’, No. 1055-r, signed 30 July 2009. 17 According to the IEA World Energy Outlook 2011, ‘‘against a background of concern about high end-user electricity prices, the government appears reluctant for the moment to add higher costs into the wholesale mix by agreeing to include a premium in tariffs for new renewable-based electricity.’’

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political support, Russia is interested in developing a national renewable energy industry, but the government is concerned about the impact on consumer prices. The availability of relatively cheap fossil fuels in Russia reduces the interest of policymakers in the development of alternative modes of electricity production, in particular given the cost of these investments in connection to the high political sensitivity of price increases in the energy sector. The joint project mechanism under Directive 2009/28/EC provides Russia with the opportunity of developing a national renewable energy industry without this having a significant price impact on domestic consumers. Under this mechanism, EU Member States would finance the development of the large renewable energy resource base in the North-West of Russia, on the basis that this would enable the EU to achieve its mandatory renewable energy targets. At the same time, if these investments involve Russian manufacturing companies and Russian electricity companies, it will help Russia to gain experience and know-how in this field. This could influence the learning curve for renewable energy projects in Russia and thereby accelerate cost reductions (Fischedick et al., 2011) to the benefit of Russian electricity consumers.

5.3.2. Promoting domestic use of renewable energy sources In accordance with Directive 2009/28/EC, part of the electricity from a joint project with third countries should be directed at domestic use by the country concerned.18 Joint projects could thus enable Russia to benefit from EU financing for renewable energy installations19 and yet still use part of the output of these installations for domestic use. Fig. 2 illustrates the support by EU Member States that renewable energy investments in Russia could potentially receive under the joint project scheme. This would contribute to the Russian renewable energy target and give a positive stimulus to the development of a renewable energy industry in Russia. It would also contribute to capacity building in this sector and facilitate future projects based on this experience. In case existing electricity exports are ‘‘greened’’ following the scheme presented in Section 6.1 of this paper, Russia would also benefit from a reduction in its national GHG emissions under the United Nations Framework Convention on Climate Change. GHG emission reductions would not be transferred through arrangements under Article 9 of Directive 2009/28/EC but would benefit the host country, in casu Russia.

5.3.3. Employment, regional economic development and local environmental benefits Recent studies have demonstrated that renewable energy policies contribute to the creation of high skilled jobs, in particular in the maintenance and operation of renewable energy installations (RenewableUK, 2011). Subject to the involvement of local companies and workers (including training of workers), renewable energy investments in Russia could provide employment in an innovative industry. Foreign (EU) direct investment in renewable energy projects in the North-West of Russia could contribute to the transfer of capital and technology to this region. This could stimulate innovation and contribute to regional 18 It must be noted that this condition is not formulated in a binding way. Member States have a large margin of manoeuvre in this respect. 19 Directive 2009/28/EC does not limit the share of capital investment that could come from EU Member States. It also does not regulate the question of ownership – EU or Russian – of the renewable energy installation. Investors in joint projects could thus freely determine these financing and ownership issues in the investment agreements governing the projects.

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16 14

Wholesale electricity market price in euro cent/kWh, average for European and Siberian zones excluding capacity price Average weighted support all technologies

12 10 8

Average weighted support onshore wind

6 4 2012 Rus sian non re gulated w holesale electricity price e xcluding capacity price

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ly Ita

K U

s nd r la he et N

Lu

xe

Be

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lg

bo

iu

m

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

ur g

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Fig. 2. Possible EU support for renewable energy projects in Russia. Fig. 2 represents electricity price forecasts excluding the capacity price (i.e. remuneration for the availability of power plants to produce electricity) because variable renewable energy sources (e.g. wind and solar PV) are unlikely to meet the current capacity supply requirements (e.g. dispatchability/maneuverability) in the Russian wholesale market (see Boute, 2012b). Sources: Council of European Energy Regulators (CEER), 2011 and to Energy Forecasting Agency, 2011.

economic development and modernization, as the MSP and Desertec envision for the MENA region. 5.3.4. Improving Russia’s image on the international scene Russia’s position as an energy superpower and as the largest energy supplier to the EU has generated concerns regarding the potential threat that it may represent for Europe (on ‘‘energy weapon’’ theories, see Smith Stegen, 2011). The country is also often criticized for its poor environmental record (Slivyak, 2012). RES-E exports to the EU could contribute to improving – in particular ‘‘greening’’ – Russia’s image on the international scene. 5.3.5. System integration costs Disadvantages for Russia may be that the connection of variable renewable energy installations to the grid could generate additional costs for the regional and federal network companies. This could necessitate network reinforcement investments and negatively influence the system balancing costs (Klessmann, 2009). Moreover, although Russia has adopted non-discrimination rules on access to the grid,20 from an investor perspective, connection and access often remains a challenge and generates relatively high costs. It must be noted that the Federal Electricity Law provides for the subsidization of network connection costs for renewable energy installations with an installed capacity under 25 MW. 5.3.6. Impact of export diversification on incumbents Russia–EU RES-E exports will, depending on the amount of energy exported, influence the fuel mix of the EU electricity sector with possible consequences for incumbent energy exporters in Russia. Incumbents in the electricity sector would benefit from increased electricity trade with the EU. Incumbents in the gas sector would not necessarily lose from Russia–EU RES-E exports. Indeed, higher penetration of renewable energy in the fuel mix of the EU electricity sector will require additional back-up capacity, 20

Postanovlenie Pravitel’stva Rossiiskoi Federatsii ‘‘Ob utverzhdenii ‘‘Pravil nediskriminatsionnogo dostupa k uslugam po peredache elektricheskoi energii i okazaniia etikh uslug, Pravil nediskriminatsionnogo dostupa k uslugam po operativno-dispetcherskomu upravleniiu v elektroenergetike i okazaniia etikh uslug, Pravil nediskriminatsionnogo dostupa k uslugam administratora torgovoi sistemy optovogo rynka i okazaniia etikh uslug i Pravil tekhnologicheskogo prisoedineniia energoprinimaiushchikh ustroistv (energeticheskikh ustanovok) iuridicheskikh i fizicheskikh lits k elektricheskim setiam’’ with subsequent amendments, No. 861, signed 27 December 2004.

including CCGT installations. In any event, for the Russian economy in general, it can be expected that the potential impact on energy export revenues would be offset by electricity export revenues and the positive impact on local job creation and innovation. 5.3.7. Security of renewable energy demand An important risk for Russia relates to the possibility that EU Member States would renege on the commitment to purchase RES-E from Russia for the agreed duration. The regulatory uncertainty and instability that has recently affected renewable energy investors in different EU Member States (including Germany and the UK) illustrates the fact that this risk is far from being hypothetical (see European Commission, 2010a; Institutional Investors Group on Climate Change, 2010). In case of strong economic downturn, Member States might be tempted to refuse to honor their contractual commitments with Russia. To mitigate this risk, Russian investors could, in a similar way to the mechanism outlined for the EU, insure the PPA and their investment agreements under MIGA or invoke bilateral investment treaties with the concerned Member States. 5.3.8. ‘‘Selling out’’ Russia’s low-cost renewable energy potential By exporting the electricity produced from cost-competitive renewable energy sources to the EU, Russia could run the risk of ‘‘selling out’’ its low-cost renewable energy resource base instead of using it to achieve its own national target of 4.5% RES-E consumption and production by 2020 (see Klessmann et al., 2010). On the other hand, as argued above, EU financing under the joint project mechanism could reduce the learning curve for renewable energy investments in Russia and could stimulate the development of a domestic renewable energy industry without imposing costs on consumers.

6. A potential way forward Building further upon the preceding analysis, feasibility studies are needed to determine the specific cost advantages (‘‘hard’’ numbers) for EU Member States and Russia to cooperate in the development of Russia’s Northwestern renewable energy resource base. Provided these studies identify joint projects with Russia as an attractive option for Member States with limited cost-effective renewable energy potential to achieve their national 2020 and (still to be determined) 2050 targets, the

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Certified RES-E Plant

Connects to the Grid

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EU Member State

Relevant Authority nominates equivalent amount at the time of production

Electricity nominated as produced from RE-sources is accounted towards national RE-targets

EU Commission Notification Proof of nomination Proof of RES origin Acknowledgment by host country

Amount nominated

Russian Federation Unified National Grid

EU Community ENTSO-E Significant amounts of electricity are already exported through existing infrastructure BORDER

Fig. 3. ‘‘Greening’’ existing Russia–EU electricity exchanges.

following short-term and long-term cooperation scenarios are possible. 6.1. Short-term scenario: ‘‘greening’’ existing electricity export capacity Even in the absence of investments in the reinforcement of EU–Russia interconnection capacity, EU Member States and Russia could already begin to cooperate by ‘‘greening’’ existing electricity export transactions. An amount of electricity produced from newly-built renewable energy installations in Russia could be counted towards national targets up to the maximum amount of electricity that Russia currently exports to the EU. The condition for this ‘‘greening’’ operation is the nomination at the EU-Russian border of an amount of electricity that is equivalent to the amount of RES-E produced in Russia and that will be counted towards the national target. Directive 2009/28/EC refers to the ‘‘importation’’ of RES-E produced abroad to the Community grid. It also refers to the ‘‘consumption’’ of RES-E in the Community. However, according to the physical laws of electricity, there can be no certainty that precisely the electricity produced from renewable energy will be physically exported to the EU and consumed in the EU.21 As introduced above, once the RES-E is injected in the Russian grid, it is physically impossible to distinguish it from other electricity flowing on the grid. In accordance with Directive 2009/28/EC, there is therefore ‘‘consumption’’ in the EU if an ‘‘equivalent amount’’ of electricity is nominated at the interconnection capacity. Any RES-E injected in the Russian grid could thus be counted towards national targets as long as there is nomination of an equivalent amount of electricity for the same period of time. In practice, this means that, for each unit of RES-E produced from newly-built installations in Russia and to be counted towards EU targets, Member States would have to make the necessary arrangements to allocate a corresponding amount of 21 According to the European Court of Justice, ‘‘the nature of electricity is such that, once it has been allowed into the transmission or distribution system, it is difficult to determine its origin and in particular the source of energy from which it was produced.’’ Judgment of 13 March 2001. PreussenElektra AG v Schhleswag AG, Case C-379/98, ECR 2001 I-02099.

electricity export on the Russia–EU interconnection.22 States – possibly through the intermediary of private investors – will have to make these arrangements with the relevant system operators – and probably also with INTER RAO UES which de facto controls export transactions from Russia. As illustrated in Fig. 2, RES-E installations in Russia that inject electricity in the Russian grid would be considered as ‘‘consumed’’ in the EU as long as this electricity is backed by an equivalent nomination at the border for the same time of production. This would have the effect of ‘‘greening’’ existing exports to the EU by replacing those exports with electricity produced from renewable energy sources in Russia through the nomination of an equivalent amount of interconnection capacity (Fig. 3).

6.2. Long-term scenario: towards a RUSTEC vision? To fully develop the large renewable energy resources base in the North-West of Russia, new interconnection capacity will be needed. Financing this interconnection reinforcement is the biggest challenge to greening Europe’s electricity supply on the basis of the large potential for renewable energy in Russia. Importantly, Article 16 of Directive 2009/28/EC encourages Member States to facilitate interconnection reinforcements for the import of RES-E to the EU grid. In accordance with this provision, Member States ‘‘must take the appropriate steps to develop transmission (y) grid infrastructure (y) in order to allow the secure operation of the electricity system as it accommodates the further development of electricity production from renewable energy sources, including interconnection between Member States and between Member States and third countries’’. The requirement on Member States to take ‘‘appropriate steps’’ to develop their interconnection capacity with third countries so 22 Interestingly, the company Inter Green Renewables and Trading AB – a company partly owned by a 100% subsidiary of INTER RAO UES (RAO Nordic Oy) – has reserved 320 MW interconnection capacity at the Finish-Russian border (Fingrid, 2012). The official strategy of Inter Green Renewables and Trading AB is that ‘‘the company shall establish itself as a solid electricity producer of renewable energy. All its profits will be invested into renewable energy production or actions to strengthen the business in preparing it for the future’’ (Intergreen, 2011). The authors are grateful to Steffen von Buenau for this information.

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as to stimulate the development of RES-E offers important legal justification for efforts by Member States to remove one of the main barriers to the developments of joint projects in Russia: the limited amount of interconnection capacity between Russia and the EU network. Moreover, interconnection projects could benefit from support as projects of EU interest under the Trans-European Energy Network (TEN-Energy) framework. The 2011 proposal by the European Commission (2011d) for a new Regulation on Guidelines for Trans-European Energy Infrastructure aims to enable Member States to achieve their mandatory renewable energy targets by facilitating the integration of RES-E into the EU grid. Interestingly, the 2006 TEN-Energy Guidelines23 recognize the role of renewable energy in the context of the Baltic Ring project which aims to reinforce the interconnection capacity between the Baltic states, the rest of EU and Russia. It could also be possible to make use of the financial means resulting from the auctioning of carbon allowances under Directive 2003/87/EC establishing the European Emissions Trading Scheme (as amended by Directive 2009/29/EC). In accordance with Article 10, para. 3 of this directive, the revenues generated from the auctioning of allowances can be used to stimulate the development of renewable technologies so as to meet the EU commitment of 20% renewable energies by 2020.

7. Conclusion An EU–Russia Renewable Energy Plan or RUSTEC presents benefits that could help EU Member States to achieve their mandatory renewable energy targets in a cost-efficient way. In the longer term, developing the large renewable energy resource base in the NorthWest of Russia could contribute to attaining the ambitious 2050 EU decarbonization objective. At the same time, this cooperation could assist Russia in laying the foundations of a national Russian renewable energy industry. Directive 2009/28/EC provides a legal basis to enable the financing of renewable energy investments in Russia with EU support. There are important challenges to EU–Russian renewable energy cooperation, including the difficulties that project implementation face in Russia. However, the prospects offered by Russia’s large renewable energy base are worth seriously considering the RUSTEC option in short-term and long-term EU energy and renewable energy scenarios and strategies.

Acknowledgement The authors are most grateful to Steffen von Buenau (IFC Russia Renewable Energy Program) for outstanding research assistance. Moreover, this article benefited from very useful comments and input by Nigel Bankes, Andrei Belyi, Elena Merle Beral, Christian Cleutinx, Yanal Abul Failat, Andreas Goldthau, Sheelagh Killen, ¨ lz, Simon Pirani and Alexey Zhikharev. Anna Korppoo, Samantha O This article represents the views of the authors only, not necessarily of the organizations to which they are associated. All remaining errors must be attributed to the authors only. References Artemyev, 2011. Development of electricity trading business between Russia and Norway: ‘‘Pechenga Power Bridge’’ cross-border interconnection project. Presentation at the Second Norwegian–Russian Business Forum. Available

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