Russia Access to Energy Research Brief

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Current Energy Landscape

Russia is the second largest producer of fossil fuels globally, and possesses territory containing 80 per cent of the world’s fossil fuel energy.[annotate info=’Clemente, Jude. “How Much Energy Does Russia Have Anyways?” Forbes, March 25, 2015.’] With an estimated 455-year supply of coal, and shale fields in Western Siberia many times the size of those that sparked the recent American fracking renaissance, energy security is not a pressing concern for the Russian Federation.[annotate info=’Clemente, 2015.’]  Such huge hydrocarbon reserves also mean that developing renewable energy is not a strategic goal for the Russian Federation, and investors have little incentive to fund studies or technology to diversify energy sources.[annotate info=’Rousseau, Richard. “Russia’s Energy Policy: Expanding Influence.” Diplomatic Courier, October 30, 2013.’] As such, Russia remains extremely dependent on fossil fuels for their energy needs. Although Russia is a huge global exporter of hydrocarbons, they also face a growing domestic demand for energy. By engaging with the globalized world, gas prices have doubled over the past 10 years, placing a major strain on lower income families in Russia.[annotate info=’Rousseau, 2013.’] In 2012, about 60 per cent of the gas produced in Russia was consumed domestically.[annotate info=’EurActiv. “Russia’s Natural Gas Dilemma.” EurActiv, April 11, 2012.’] Domestic gas sales are driven by one of the highest per capita consumption rates in the world — understandable, given Russia’s often cold climate and dark higher latitude. Additionally, Russian industry relies heavily on natural gas energy inputs.[annotate info=’EurActiv, 2012.’] The result is one of the most energy inefficient economies on the planet; Russia consumes roughly five times more energy per unit of Gross Domestic Product (GDP) than any other International Energy Agency (IEA) country.[annotate info=’Lychuk, Taras, Mark A. Halverson, and Volha Roshchanka. Analysis of the Russian Market for Building Energy Efficiency. Pacific Northwest National Laboratory, 2012.’][annotate info=’Laan, Tara. “The High Cost of Cheap Energy: Russia’s Fossil-Fuel Subsidies Undermine Sustainable Development.” International Centre for Trade and Sustainable Development, July 11, 2011.’]

Energy Subsidies

Russia’s rich patrimony of fossil fuel reserves has led to the belief that cheap energy is the natural right of all citizens. To fulfill this expectation, Russia relies on an extensive system of commercial and residential energy subsidies. Unfortunately, these subsidies, along with the country’s massive fossil fuel reserves, are responsible for stifling innovation and creating Russia’s energy inefficient economy. In general, governments implement subsidies in an attempt to either stimulate a specific sector of the economy (for example manufacturing and agriculture in developing countries) or to aid the poorest members of society.[annotate info=’Dansie, Grant, Marc Lanteigne, and Indra Overland. “Reducing Energy Subsidies in China, India and Russia: Dilemmas for Decision Makers.” Sustainability 2, no. 2 (February 1, 2010): 475–93. doi:10.3390/su2020475.’] However, the short-term welfare and development benefits derived from energy subsidies are most often outweighed by their economic and environmental distortions. First, long-term, artificially low prices lead to wasting energy; consumers have no incentive to conserve, and greenhouse gas (GHG) emissions are unnecessarily high. An OECD study estimated that carbon dioxide emissions could have been reduced by six per cent globally between 2000 and 2010 if fossil fuel subsidies to industry were removed worldwide.[annotate info=’Dansie et al, 2010.’] Second, energy subsidies place a major strain on government budgets. Although oil prices crashed following the 2008 global recession, this actually placed a greater strain on subsidizing states, as falling tax levels made it even harder to upkeep expensive subsidies.[annotate info=’Ibid.’] The result is that socially beneficial institutions such as education and healthcare are starved of finances. In Russia, although gas exports are far smaller by volume than gas consumed at home, domestic sales are much lower than foreign sales.[annotate info=’eia. “Oil and Natural Gas Sales Accounted for 68% of Russia’s Total Export Revenues in 2013.” Today in Energy, July 23, 2014.’] The IEA estimated total Russian energy subsidies to be worth US$34 billion in 2009 — an amount that must somehow be made up from other government revenue.[annotate info=’Ibid.’] Finally, subsidies create major investment barriers to the development of renewable energy, as renewables cannot compete with artificially low fossil fuel prices. When the economy and society are looked at as a whole, energy subsidies tend to be more of a barrier than a support in achieving the United Nations’ post-2015 goal of “affordable, reliable, sustainable, and modern energy for all.”[annotate info=’Ruchser, Matthias. “Energy – the Seventh Sustainable Development Goal.” German Development Institute, March 9, 2015.’]

Russia traditionally operates under a “four-tier” price system for natural gas, with the lowest two tiers for domestic sales (residential/commercial and industrial), the third tier for previous Soviet-bloc countries, and the highest tier for foreign sales.[annotate info=’EurActiv, 2012.’] Russian domestic gas subsidies are so high that the monopoly Gazprom is forced to sell gas to domestic consumers at about 60 per cent the cost of production — the company is only able to stay afloat with the revenue from foreign sales. The prospect of poor sales domestically discourages private companies from investing in necessary production and distribution infrastructure. For Russian communities, the result has been electricity shortages, and a high wastage of power because of inefficient grids.[annotate info=’Laan, 2011.’] From an access to energy perspective, this creates an interesting catch-22: should Russia attempt to phase out energy subsidies to stimulate innovation, efficiency, and renewables at the risk of pricing low-income families out of the energy market? There are strategies to avoid this worst-case scenario, such as using the newly available government revenue from reduced subsidies for direct cash transfers to the poor, or increased health care and education services. However, reforming energy subsidies is a difficult political proposition, as it is the middle and upper classes — those most politically connected — who gain the greatest benefit of subsidies.[annotate info=’Whitley, Shelagh. “Time to Change the Game – Fossil Fuel Subsidies and Climate.” London, England: Overseas Development Institute, November 2013.’]

Northern Communities

Figure 1: Zones of the Russian power market. Source: Makarov, 2015
Figure 1: Zones of the Russian power market. Source: Makarov, 2015

Similar to Canada, Russia has many isolated, far-northern communities that are logistically and economically infeasible to connect to the central electricity grid that covers only the European part of the country and part of southern Siberia. Figure 1 shows the different price areas in Russia; the area highlighted in blue represents the non-price zone, or the parts of the country not connected to the grid where energy prices are completely set and regulated by the government.[annotate info=’Makarov, Igor. “Energy Access: Provision of Energy in Isolated Areas in Russia.” In Energy Access in BRICS Nations. Observer Research Foundation, 2015.’] Like Canada, these regions rely on expensive delivery of fossil fuels either by boat or truck during the region’s short summer. However, while Canadian communities depend on household diesel generators, Northern Russian communities receive large shipments of highly subsidized coal to power microgrids, and liquefied natural gas (LNG) to heat homes.[annotate info=’Makarov, 2015.’] In Canada, there is a growing dialogue between governments, non-profits, private companies, and the media on the need to invest in more sustainable options such as solar, wind, or biomass generators to power microgrids. In Russia, that dialogue is almost non-existent, perhaps due to the country’s extensive coal and gas reserves controlled by state-run agencies. A joint study from 1999 by the US Department of Energy, USAID, and the Russian Ministry of Fuel and Energy found extensive wind reserves along the country’s Arctic coasts. However, cheap fossil fuel prices and large reserves have diminished any incentive to develop this resource.[annotate info=’Gevorgian, Vahan, K. Touryan, P. Bezrukikh, V. Karghiev, and P. Bezrukikh. Wind-Diesel Hybrid Systems for Russia’s Northern Territories. National Renewable Energy Laboratory, 1999.’]


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