International Thoughts for the Energy Experts Contribution to the G8 The Energy Editorial, July 2009
Just a year ago the G-8 was held in a completely different environment: there was no crisis, Russia had not cut the gas off to its European partners, oil prices were tremendously high and going higher. Even so, today"s world is not that much worse than yesterday"s. It is simply different and we face a lot of puzzles to fit into a new mosaic of international and energy relations in Europe and all over the world.
The following pieces may be a part of that mosaic.
The Ukraine-Russia gas turmoil has made clear - That European energy market and European Economic Area go beyond the official borders of EU and even EEA. It is also clear that Russia is definitely within these broader borders, but with a very unclear legal basis. The crisis in an unexpected way has brought EU towards energy relations of its eastern neighbors although what we"ve managed to create is still unclear and temporary. Gas ruptures and Ukrainian gas piracy have made evident that however Europe chose to extend its initiatives eastward, these EU initiatives are destined for failure if they are not coincident with and reinforcing of Russia - EU relations. Fortunately, we are still at the beginning of a new chapter in our relations as Russia negotiates its new PCA with EU and the countries, which are subjects of the “Eastern partnership”. I note in passing that to me, “common neighbors” sounds better.
Lower energy prices have made very vulnerable all politically motivated energy and transportation projects and instability in the Caucasus and Middle East contributes additional uncertainties. So, perhaps it is time to set aside extensive energy supply diversification, and focus on balancing the interests of market players", transit countries" and consumers" by forging a clear legal basis for that balance. I don"t mean by the simple revival of the Energy Charter, but by drawing on its legal heritage to digest and implement a new document elaborated in the context of Russia - EU negotiations.
Energy has been strongly effected by the global financial crisis and vice-versa. Within the last decade the energy market was converted from a traditional commodity to an asset class in the financial derivatives market without any clear logic. It"s sounds shocking, but only 5% of future contracts reach physical delivery, though futures define the overall price situation and economic environment. Unfortunately, the economic crisis has not provided a remedy for that. Oil prices are still under the control of the effective “cartel” of NYMEX and London Commodity Exchange players. These players are much less transparent and understandable than OPEC members or those who might participate in the still under-creation consortium of gas producers. Probably, in this case Europe should think about its own Energy Commodity Exchange, with clear goals and greater transparency?
Taking into account an increasingly integrated European gas market we could say that natural gas is becoming also an exchange commodity in the same sense as oil and metals. Transparent gas pricing would help exclude open and fierce gas conflicts.
Russia"s energy profile will also change under the current circumstances. Our economy will need to rely on its tremendous financial reserves gained during the energy and financial discipline of President Putin"s decade. This will not be a simple panic-like wasting of money, but systematic support of the core industries, banks and social infrastructure. Meanwhile, we recognise that previous selfish attitude of some Russian experts and politicians towards foreign investments in Russian energy should be addressed.
In legal terms, the Russian regulatory framework is still evolving with respect to specific energy industries. The electricity sector in Russia has been widely liberalized. On July 1, 2008 RAO UES, the Russian electricity monopoly ceased to exist. It was divided in accordance with ownership unbundling requirements, which, I may note, are far from being implemented even in the EU. On one hand, ownership of the technology infrastructure (network management and the system operation) is concentrated in single legal entities (predominantly owned by the state), whereas the electricity production, distribution and supply is divided between independent competing companies.mong such foreign players is Italian giant Enel.
In accordance with recent amendments in the Law on Electricity Market, commercial infrastructure of the wholesale market was made more responsive to market needs. The commercial functions of wholesale market management were separated from the regulatory ones. Now the management of the market is being executed by the commercial operator, which is a private company, and the regulation - by the Market Council being non-commercial entity.
The rules of the game in the oil and gas sector were amended in April 2008 introducing some new requirements for foreign investors. In order to be able to execute large investments while maintaining a certain degree of control over Russian oil and gas companies, it is now necessary to receive project approval from the government commission. One may argue that this is protectionist. That may be true, but comparative legal studies show that almost all oil and gas producing countries, including U.S., U.K. and Norway impose additional burdens on foreign investors seeking to enter their respective markets. Therefore, in this respect Russia simply follows the international trend.
On the other hand, the decision-making of the Russian Government is relatively flexible, especially as almost all leading economies are struggling to retain existing investors and to attract new ones.
The G8 has proven to be an effective, expanding governor of energy, climate and their connection in several ways. Partially, under the impact of its participation to the G8, Russia seems to start rethinking its energy policy. This rethinking has been partially reflected within the project of Russia"s energy strategy presented by the Energy Ministry in late autumn 2008. The Strategy outlines future developments and plans until the year 2030.
What is really new in Russia"s approach is its serious stress on ecology. This is not a pure humanitarian interest, but reflects deep understanding of the economic meaning of ecology. First steps towards such understanding were provoked by discussing Kyoto rules within recent years. At the 2008 G-8, Russia had a really very positive view of the Japanese Cool Earth Initiative, which logically derives from Kyoto.
President Dmitri Medvedev has begun to outline what could become a serious Russian initiative to address the environmental impact of profligate energy use and to encourage greater energy efficiency. In a decree signed by the President on June 4, 2008 the government was instructed to submit draft legislation to the Duma which would provide incentives for introducing environmentally friendly and energy efficient technologies. The order also calls for allocating funds in the 2009-2011 federal budget for renewable energy and providing subsidies for specific projects. These steps may indicate that the elements of a broader domestic energy policy extending beyond the oil and gas sector are now being put in place. All this is occurring at the same time Russia is making clear its intention to play a larger role in the international effort to address climate change and global warming. Russia's new policy direction - and particularly its interest in alternative energy - is important because Russia is such a large energy exporter (number one in natural gas and number two in oil), and is now the third largest emitter of CO2 from fossil fuel (behind China and the United States). The program for development of alternative, renewable energy resources was approved by the Russian government in June 2009. For the first time in the history of Russian economic policy, there is an instrument for financial stimulation of innovative technology. According to the program, the amount of alternative energy should by 2020 reach 4.5% in the Russian energy balance. That"s good for a start. Alternative energy is also significant. President Medvedev has coupled his complaints about the wastefulness of Russian industry and the lack of environmentally sound technologies with the need to improve Russia"s international competitiveness and develop technologies key to the success of his “innovation strategy.” Over time, a more diversified energy policy could also open up avenues for entrepreneurial businesses in Russia as well as partnerships with some of the fastest growing energy sectors in Europe and US.
Anticipating the adoption of renewable energy laws, Russian and foreign investors are now beginning to explore investment opportunities for hydropower. For example, Japan"s Mitsui and Norway"s Statkraft are considering proposals to build a number of hydropower plants in the North Caucasus. In addition, the federal government is ready to financially assist HydroOGK with construction of the Mezen Bay tidal power station on the White Sea, which would supplement the existing Tugurskaya tidal power station on the Sea of Okhotsk and the Kislogubskaya tidal power station on the Barents Sea. Several Russian investment companies, including Mikhail Prokhorov"s Onexim Group, are seeking to implement hydrogen-fuel projects. Looking further ahead, Russian Minister of Industry and Energy Victor Khristenko already in the spring of 2007 announced plans to use hydrogen-fueled buses at the 2014 Olympic Games in Sochi. Holland"s European Technology and Investment Research Center (ETIRC) is going to provide Sochi with conversion technologies for gasoline and diesel buses to be powered by hydrogen. In Russia, sometimes, political signals matter greatly, but, increasingly, so do economic ones.
If the focus of political leadership was previously on gas and oil production since the state budget relied heavily on tax revenues from these industries, there were few incentives to innovate and develop new resources on a significant scale. In the future, however, as domestic gas prices increase and the cost of renewable energy technologies comparatively falls, the percentage share of renewables should grow.
Ecology goes hand to hand with energy efficiency, as the European Communities did in 1970s-1980s and what has to be done by new EU members. The above quoted Presidential decree and Government Order of June 18, 2008 formulated a comprehensive plan for improving energy efficiency and enlisted the following measures to take:
- Development of a modern legal and regulatory framework
- Establishment of institutional structures
- State support and the creation of a favorable investment climate
- Interaction with the business community and financial institutions, on the basis of a public-private partnership
- Informational and educational support for measures at international, federal, regional and municipal levels.
In 2008 energy consumption in Russia totaled about 990 m. t.o.e.(million tons of oil equivalent). Upon reaching the EU level, in terms of energy saving and energy efficiency equipment, energy consumption in our country would be reduced to 650 million toe. In other words, we currently loose about 40% of our energy to inefficiency. Achieving energy efficiency creates tremendous room for technological and economic cooperation, as well as foreign investments to Russia.
In the field of renewable energy and energy efficiency, almost everything still needs to be done in terms of education and training. It should be applied particularly to former Soviet areas and the developing world. In this case national leaders as well as the international community should provide strong support, to specialized nation-wide programmes, which could be underpinned by international efforts, such as GREET programme realized by the UNESCO or NEET initiative launched by the IEA.
Innovative technologies adjusted to the actual conditions of the developing countries provide a potentially powerful tool for energy poverty reduction. Therefore, Technology Transfer Fund and other initiatives in the field of disseminating knowledge and basic technological competence should be strongly supported.