Outlook: Winds of Change from the East

In some ways, the power industry in Russia’s Far East exists in a world of its own. Unlike most of the country, the macro-region lacks the electricity and capacity market; tariffs are regulated. Almost all grid infrastructure is operated by the RusHydro subsidiary RAO Energy Systems of the East, which has close to 9 GW of generating capacity (two thirds of the regional total) plus a further 18,000 Gcal/h in installed heating capacity. Not surprisingly, all the main electricity-related news items coming out of EEF-2016 – and there were several – touched one way or another on RusHydro.

Changing partners

The most impressive and energetic foreign delegation was from Japan, which was represented not only by Prime Minister Shinzo ABE, but also by the chairmen of the boards of giant companies like Mitsui, Iida Group Holdings, Fujitsu, SoftBank and Marubeni Corporation. China’s delegation this year was headed by a mere vice-chairperson of the national parliament, Chen CHANGZI, which essentially rules out any important decisions being taken at the national level.

As became clear at the forum, Japanese companies are extremely interested in the Russian Far East’s energy sector, both as a source of power and as a market for their technology. For starters, Mitsui and JBIC (a bank) are considering taking up stakes in RusHydro, specifically treasury shares worth up to 4.88 percent of equity. The parties have signed a corresponding memorandum, which also provides for joint projects, “including projects based on Japanese technology,” the company announced. Alexander GALUSHKA, Minister for the Development of the Russian Far East, stated that details of the transaction could be worked out by the time Russian President Vladimir PUTIN meets with Japanese Prime Minister Shinzo ABE in December.

The investment would reinforce the Japanese companies’ presence in Russia’s energy sector and could become a springboard for further penetration, as well as moves into other industries, thinks Dmitry BARANOV, a leading expert with Finam Management. “For the Russian company, of course, there’s a real reputation effect: having that kind of shareholder is just excellent. It pushes up market value and generates increased interest on the part of other foreign players,” he believes. “Furthermore, the partnership could help RusHydro expand into neighboring countries’ markets.”

Japan is interested in the Russian market for power industry equipment, and the easiest way to enter that market is via joint projects with Russian companies. Following that logic, Mitsui concluded a second agreement with RusHydro, in this case covering technical cooperation. According to the Russian company, the deal is intended to promote renewable energy projects in isolated areas of the Russian Far East and geothermal projects in Kamchatka Territory. An expansion of the Mutnovsky GeoTPP that would more than double its capacity – from 50 to 120 MW – could become the pilot project.

A third agreement signed by RusHydro at the EEF also involves equipment, in this case via a partnership with Sojitz Corporation, a major Japanese trading company. By acting as a sort of intermediary, the corporation can facilitate dealings with other Japanese companies, such as Kawasaki Heavy Industries. Among other things, the agreement calls for studying ways to localize equipment production in the Far Eastern Federal District.

Prior to the forum, China was seen as the main Asian partner for Russia’s power companies. Partnership agreements had been signed and various projects were under consideration, but no major initiative was ever carried through to fruition. Top RusHydro managers said during the forum that China Three Gorges Corporation had declined to purchase a 49 percent stake in the Nizhne-Bureyskaya HPP in Amur Region. For its part, RusHydro dropped plans to construct a series of flood control HPPs in the Far East; China Three Gorges Corporation was to have been a partner.

King Solomon’s Ring

The big news at EEF-2016 was Vladimir PUTIN’s statement on the proposed Asian super ring. “We support the initiative of Russian, Japanese, South Korean and Chinese companies to create a super energy ring linking our countries as one. We propose setting up an intergovernmental working group in order to move ahead more rapidly and dynamically on this project. Let me note that Russia is ready to offer its Asia-Pacific region partners competitive energy rates and long-term fixed price contracts,” he said.

The idea is not a new one: an Asian super ring was first discussed in the late 1990s. Discussions of the initiative tailed off and revived several times, taking on fresh momentum in March 2016. “Everybody gains from cross-border energy integration. Grids become more reliable thanks to smoother load curves, production capacities are used more efficiently with minimal capital investments in new energy infrastructure, and access to new reserves makes grids more resilient in the face of natural disasters or technical failures, as well as unexpected imbalances and other negative developments,” Roman BERDNIKOV, First Deputy General Director of ROSSETI, explained at the time.

In practice, however, a project on this scale involves a huge range of organizational, technical and financial challenges. For many years, Russia has been unable to reach agreement with even one country – China, again – on the cost parameters for increased power exports from the Far East. In essence, China wants to pay less than Russia is willing to accept.

As for Japan, the country’s laws currently include an outright ban on importing electricity. True, that ban could be lifted soon for the sake of one link in the super ring: the Russia – Japan energy bridge. “Our colleagues have confirmed their interest. They have also noted that they are prepared to amend legislation, as at the moment in Japan there is a ban on the import of electricity,” Alexander NOVAK, the head of Russia’s Ministry of Energy, said at the forum. “I should mention that plans for construction of an energy bridge have moved to a practical level: work is now under way on a feasibility study, which will be completed this year.”
On top of everything else, it is not yet clear how the ring will be closed: to all appearances, North Korea has not yet been a party to any negotiations. Yet without that country’s participation, the super ring is fated to remain no more than a subject of discussion at the Eastern Economic Forum.

Opinion

Denis ASKINADZE, Deputy CEO of the Far East Development Fund:

“Japanese companies’ interest in the Russian electricity market stems from a whole range of factors. First, it’s a large market. Russia ranks fourth in the world by generating capacity, after the US, China and Japan. Second, there is a real need to replace outworn and inefficient equipment. Depreciation of generating equipment exceeds 65 percent, and energy conversion efficiency is low (around 37 percent at existing CHPPs, compared to an international benchmark of over 43 percent).

On the whole, the projects involving Japanese companies look realistic if targeted long-term financing is available – which is quite possible given negative returns on domestic investment in Japan – and if prices are fixed, including under CCS, motivating power companies to invest in replacing equipment.

The energy bridge to Japan falls into the category of megaprojects that would draw in both the coal industry and the grid complex. With a price tag in the billions, it will require synchronized grid management between Russia and Japan, the laying of an undersea power cable across the La Perouse Strait, and legislation to permit energy imports from Russia. Working alongside Japanese companies will open up opportunities for technology transfer, both during operations (as equipment is used) and at the production stage (localized manufacturing in the Far East).”

The most impressive foreign presence at EEF-2016 was the Japanese delegation, headed by Prime Minister Shinzo ABE

The Mutnovsky geothermal power plant in Kamchatka could be the focus of a pilot project on technical cooperation between RusHydro and Japan’s Mitsui


By Anna MILINA and Svetlana TOMINA

04-12-2016 14:22