Challenges in the Russian Power Sector

by Jonathan Vasdekas

Electricity is a fundamental need for any working, modern economy. Without access to electricity, businesses and citizens cannot function efficiently and effectively. Blackouts in major cities can cripple a region. Nowhere is this more profound than in Russia; the 2005 Moscow blackouts brought the city to a crawl. One approach to prevent such events from happening is to make the appropriate investments in the electricity generation sector. The capital investment in this multifaceted sector is monolithic; estimates for the amount of investment required to modernize the Russian electricity sector is approximately $500 billion dollars.

In order to produce and distribute electricity, there must be a great deal of complex infrastructure and regulations in place. Due to the complexity of the infrastructure and the size of the investments that must be made, there must be regulations that can protect companies’ investments. Without this regulatory protection there is no incentive to invest in such a risky and costly sector.

Keeping reduced electricity and gas prices is vital for keeping political unrest low.

Today in Russia, electricity is cross subsidized with the domestic tariff lower than the industrial one. The opposite is the case in many Western economies. For the market to become more profitable and attractive to the kind of foreign investment required for modernization of the Russian electricity sector, the consumer must simply pay more, but raising the prices for the private consumer is a huge challenge for Russian authorities. State-run companies such as Gazprom, Rushydro, and Rosatom dominate electricity generation in Russia. The price of electricity and energy is a political issue in all countries, and Russia is certainly not an exception. Politicization of energy stymies the political will to effectively change the regulation of energy in the Russian Federation.

Keeping reduced electricity and gas prices is vital for keeping political unrest low. However, maintaining low utility prices is not sustainable for the long-run and Russia will need to employ specific and effective changes in the regulations in the energy sector in order to attract the necessary investment. Otherwise, it will face blackouts if capacity for the peak demand of electricity cannot be produced, distributed, or both.

The amount of energy and money lost from using inefficient technology and pricing systems is immense.

The Russian Federation is one of the most energy intensive countries, using much more energy than required due to inefficiencies in the production and transmission systems from using obsolete technologies. The amount of energy and money lost from using inefficient technology and pricing systems is immense. Investing in the power sector can have huge benefits for the gas sector in Russia, as the more gas saved from being consumed domestically, the more can be exported to Europe for profit.

It is not only domestic challenges that Russia faces, however, when it comes to power generation. Energy is a global commodity and Russia, a major actor in the global energy arena, is affected by different actors such as Germany, the United States, and Japan. For instance, the events in Fukushima prompted Germany to pursue legislation to shift away from the nuclear generation of electricity towards a more carbon-based and other green modes of production. De-commissioning nuclear power plants is a costly endeavor and commissioning new carbon-capture coal power plants and gas power plants is even more costly. This, coupled with the shale gas revolution in the United States, which has pushed cheap coal out of the US and into Europe, has made Germany once again a large coal consumer. European companies will be more inclined to invest at home because of the higher electricity prices that will allow for the investment to be recuperated by the power generation company. This is money that before Fukushima could have been targeted for the Russian power generation sector.

People in Russia can get away without paying their own electricity bill but are still provided with electricity due to the absence of a mechanism that can turn off electricity in one apartment unit instead of the entire building.

The regulations to protect domestic and foreign investment in Russia must mirror the complexity of the energy industry. The creation of the legislation and regulations must be synthesized through a dialectic approach. Energy legislation must take into account the production and transportation of energy. Changes in one aspect of energy, whether it is in the transportation or production of energy, can have drastic effects in the market. Therefore, the regulations must be thorough and specific. Failure to attract the necessary investment for the modernization of the electricity sector can create serious problems for the Russian economy and security in the future. Until there is the political will to implement the proper regulations, the electricity production will continue to be inefficient and cost the Russian government and society billions of dollars.

European companies can provide Russia with the necessary capital and technology to modernize the electricity sector in Russia and provide solutions to some of the unique challenges that are faced. One major problem in Russia is paying for electricity. In the Caucasus region of Russia, electricity is produced and distributed at a loss. People in Russia can get away without paying their own electricity bills but are still provided with electricity due to the absence of a mechanism that can turn off electricity in one apartment unit instead of the entire building. This drives potential investors away from Russia because they simply do not want to invest billions to operate on a deficit and lose their investments.

A proposed solution to this problem is the installation of pay-as-you go meters in homes. This would operate similar to pay-as-you-go cellular phones. If you do not have credit on the SIM card, you cannot use the mobile device; if you do not pay your electricity bill, you are not provided with electricity. This is a simple solution that modernizes the electricity sector and can attract companies to invest in places that were previously deemed unprofitable.

Other problems are more complex, and their solutions will require a great deal of time and money to be successfully implemented. However, if they are not implemented, the consequences due to future blackouts such as the one Moscow experienced in 2005 could be even more expensive.

Jon Vasdekas is an MA candidate in the ENERPO program at the European University at St. Petersburg.

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