"Over the past 20 years, Russia’s energy market has become more efficient"
This year the European Bank for Reconstruction and Development (EBRD) marks its 25th anniversary. The organization emerged at a time when the countries of central and eastern Europe, including Russia, needed support to create a new private sector as they made the transition to a market economy. The EBRD was the primary investor in Russia’s power industry. In mid-September, Riccardo PULITI left the position of Managing Director at the bank in charge of the energy sector, a position he had held for many years. During that period, he made no small contribution to the development of the Russian power industry and in recent years sat on the Strategy and Investment Committee at Inter RAO, where he shared best international practices with the company. What projects in the industry are currently the focus of attention for major international investors active in Russia’s electricity sector? How are global energy trends playing out in the Russian market? Anton NAZAROV, Editor-in-Chief of Energy Without Borders, put these questions and others to Mr. PULITI.
The EBRD has granted several credits for Inter RAO. So, what projects can the Bank be interested in further?
First, I feel extremely honoured to be a member of the Strategy and Investment Committee of Inter RAO. I think Inter RAO is an example of a well-managed and transparent company. I can only congratulate the CEO and the management of the firm. As for our interest, it may go in two directions – renewables and connections. We think that these are very important for the global future of the region. Right now, we cannot make new investments in Russia. However, I hope that in the nearest future we would be able to start again. Meanwhile, we are actively working in Georgia, Kazakhstan, Romania and Turkey.
In The Guardian interview, you said that you warned Europe not to be hasty in adopting an ideological policy in carbon intensity funding. What reason do you consider the main for preserving coal-fired power industry?
The interview with the Guardian was in 2013, and subsequently there has been a change in attitude. Almost all countries in the world have agreed to tackle climate change. The future of coal is unclear, but depending on the countries and the wealth of their populations, the transition away from coal will take time. Our energy strategy, approved in December 2013, is very clear about this. It says that we can finance coal projects only in exceptional circumstances, and according to our agreed methodology.
I think every country and every utility has an interest in moving away from coal. It is easy for countries if they have few coal resources of their own, and more complicated where coal is a big part of the energy mix. I say to my clients both on the mining and on the power side to pay attention, because investment in coal could result in stranded assets twenty years from now. If technology changes, different considerations may need to be taken into account. Carbon capture and storage may change everything in the future.
What types of fuel do you see in the future? Maybe gas? There are so many discussions about the renewables, but many people say that is some kind of a political trend.
There are overwhelming trends towards energy becoming sustainable, secure and affordable. We should have secure energy systems, where people can afford to pay for energy. I think that gas has already proved its value. It is not only a very good replacement for coal because of reduced emissions, but also a very good technology to support renewables. Many fuels can be used – hydro, solar, wind, biomass, nuclear and gas – but gas is probably the best fuel to develop renewables. I think it is possible to build a very balanced and responsible energy mix.
What are EBRD priorities in investment in the infrastructural and energy sector?
We believe that the real future is in cooperation between regions and countries. It is vital to foster interconnections and relationships that enable trading. We want to focus on interconnections.
Between the countries?
Between countries, and sometimes within countries. In the case of Russia, interconnections work inside the country – it is like a continent itself. I think it is very important to develop infrastructure and renewables and to anticipate the risks that may exist twenty years from now. That is why we have to push renewables. And that is what the EBRD does, wherever we can.
You mean mainly grids, as I understand. Because interconnection has two parts - grids, the technical part, and the pay system.
Actually, I mean three things. We need new grids that connect countries within regions, and with other countries beyond those regions, and we also need smart grids. The EBRD has financed many projects with a smart grid component; energy efficiency is key in our energy development. A lot has been done in the field of digital, bi-directional and more intelligent networks. We also try to make markets more efficient, for instance with grants to regulators to help improve their operations. We think that these approaches, with investments on the one hand and policy dialogue on the other, are complementary.
In terms of energy efficiency and the balance of different types of fuel, what do you think about the big role of coal plants in Russia? Is it a trend to scythe it?
Each country will develop a different approach, but all approaches have the same goal, in other words, CO2 reduction, energy efficiency, and – in the end – sustainability, affordability and security of supply. Security of supply is essential, because its wider implications go beyond business and economics.
For customers, first of all.
For customers, first of all, because different countries have different requirements according to their climate. That is why I think security of supply is such an important issue. We believe that security of supply requires two things: efficiency and diversification. This is why we focus on interconnections and grids. If we have two interconnections and two grids, we have that diversification. If one element fails, we can still provide the energy that people need. So, diversification is key.
It’s interesting. What about the main parts of Russian fuel and energy sector, what may be interesting to the investors, from your point of view as a specialist?
I think that Russia is a very interesting country. Its location between Asia and Europe makes Russia a major corridor for the transport of goods, capital, people, and energy. Inter RAO plays a significant role in the Russian market. I have a lot of respect for Russia. I think that in the future Russia can be not only an exporter of raw materials or energy but also of technology. The world is becoming more and more digitised. When I think of countries that have produced great specialists, and in particular, great physicists, I think of Russia. And in the area of entrepreneurship, Russian companies can contribute enormously to the digitisation of the world economy. I see that as an interesting way forward.
If not to talk about Russia, what are the main drivers for you to choose the proper projects to invest?
The main driver is the potential of every country to reform their economy in the energy market so it can become more efficient. For example, we are now working on projects in Egypt. We have financed two very large gas-fired power plants. Why? This country has an inefficient energy market where energy is not priced in keeping with the market, and a lot of energy is lost, because there are few energy-saving measures in place. If you remember, this was also the situation in Russia around twenty years ago, but it is not anymore.
In the past twenty years the energy markets in many of our countries of operations, such as Russia, have come a long way. We encouraged countries that used subsidies, that did not reflect the true cost of energy, and whose level of technology was low, to tackle these issues. We provided support, again through a combination of investment and policy dialogue, but ultimately the countries had to do it themselves. And to a large degree they did.
What about the global financial crisis? Does it restrict any investments?
When we speak about global economic growth, we often think about Europe, the United States and Russia as well. So we can say the level of global economic growth remains low. To solve this global crisis it is necessary to regain the trust and confidence of global investors. If we can demonstrate how we can overcome a certain risk, we will generate trust.
Maybe you can name several projects you are interested in in this situation.
Outside Europe, countries with young populations exhibit growing demand for energy. For example, there are countries in the Middle East and North Africa where our investments can really make the energy market efficient –– Egypt, Jordan, Morocco and Tunisia. These are interesting markets, because the demand for power is huge. Together with the World Bank we would like to continue with the Central Asian markets which could supply Central and South Asia, for instance by exporting power from Tajikistan and the Kyrgyz Republic to Pakistan.
Yes. This is a fascinating project. It will generate revenue for Tajikistan and bring clean energy to Pakistan. We have the renewables and the interconnection elements – it is economically important, especially in the Central Asian context. Interconnections generate revenue and show how you can help countries.