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Geothermal Energy Systems Assessment - A Strategic Assessment of Technical, Environmental, Institutional and Economic Potentials in Central and Eastern European Countries

3 Volume II.C: Country Profile - Russia

3.1 General Background Information

Russia is a giant in terms of geography and variation of geological conditions. With only 2.8 per cent of the world population against 42 per cent of the worlds known coal resources, Russia's declining population is however relatively small.

Since the 1998 crisis, the Russian economy has picked up, and the real GDP growth rate has been positive for the last three years (see table 1).

Table 1
GDP Growth Rate (Annual Per cent) 1995-1999

Source: www.worldbank.org
*: Estimated

While the reasons behind the economic recovery are complex, the doubling of both Russian domestic and world market energy prices since early 1999 is one important factor and a major development trend affecting the energy sector.

Table 2
Key Figures for Russia's Energy-Economic Situation

Source: A combination of statistics from various sources¹⁴

3.1.1 Map of Russia

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3.2 The Energy Sector

The energy sector in Russia holds a key position both economically and politically. Having large quantities of natural gas, coal, oil, wood, uranium and hydroelectric power, the energy situation of Russia is characterized by full self-sufficiency in energy. The key position of the sector also applies to export earnings, as 40 per cent of Russia's foreign currency earnings stem from export of energy.

In the period 1995-1999 gas covered about half of the country's total energy consumption. It's noteworthy that Russian energy consumption has dropped 30 per cent from 8.5 tonnes oil equivalencies (toe) per capita in 1990 to 6.0 toe per capita in 1999. Supply-wise, is natural gas still the largest source.

The Russian industries and consumers owe the partly state-owned Gazprom, - who fully dominate the market - , more than DKK 20 billion and the lacking payments have motivated the company to aim at the export market. Russia has an insignificant production of renewable energy, with hydroelectric power and wood amounting to a few per cent of the total consumption.

District heating is of central importance to the heat supply of Russia - of which the main part is based on gas and in addition crude oil.

Since the Russian economy has high energy intensity, the energy efficiency is low. As a consequence - and considering the size of the country and the energy sector - a more efficient exploitation could result in a very large potential energy profit. This applies in relative terms as well as in absolute terms. Most estimates of Russian energy intensity are high; 20 to 100 per cent above countries with similar industries and climate. Such estimates have low reliability, because of the problems of measuring GDP and incomes in a tax avert Russia. Most analyst however seem to agree that many opportunities exist for energy savings in the region of 10 - 30 per cent, with payback times between one and five years.

Though improving recently, the 1999 level of Russian real wages had declined by 20 per cent in one year. With more than 10 per cent of the labour force unemployed, more than 30 per cent of the population lived below the poverty line of USD 35 a month. With a declining population and a life expectancy of males at about 61 years in the year of crisis in 1998, the picture of the socioeconomic situation in Russia is (or was) bleak. It is no wonder therefore, that the tariffs and user charges has not been allowed to keep pace with inflation, and to some extent has continued to serve as an instrument of social policy.

From a narrow viewpoint of energy efficiency, of course, the cocktail of low wholesale gas and electricity tariffs (at around one-tenth of the Western European level for the past decade), and low rates of cash collection despite even lower tariff levels for households, has been a major problem.

From the viewpoint of environmental protection and sustainable development, these same problem have meant that incentives for improving energy efficiency and investing in renewable energy sources has been low or absent.

If the rate of recollection is used as an indicator for the future, this incentive pattern is about to change. While the rate stood at less than 20 per cent in 1999, it had improved "very substantially" by 2000, according to the EBRD (EBRD, 2001).

With one of the worst ratios in the world for conventional energy use, Russia is very much locked in a wasteful pattern, - in 1998 no more than 4.5 per cent of the country's energy equipment was less than 5 years old.

The energy demand in Russian Federation is mostly covered by fossil fuels (coal, oil and gas) and nuclear power stations (see table 8). The contribution of renewable energy in general and geothermal energy in particular is fairly small and due to the relatively low prices of traditional energy carriers, new developments are faced with significant barriers in this area. Conversely, have many "lack-of-knowledge" barriers already been overcome, as the Russian Federation has inherited and performed a large number of researchbased assessments of its geothermal potential.

3.2.1 Energy Supply and Consumption

Annual energy use per capita has since 1992 and up until 1998 decreased by approx. 26 per cent (see table 3)

Table 3
Annual Energy Use (toe per capita)

Source: IEA, International Energy Agency

Negative growth rates have characterised especially the first part of the 1990's (see table 4). This period is also characterised by negative GDP generation. 1998 was a year with remarkably large negative GDP generation due to an economic crisis, and there was a negative energy growth rate of 2.2 per cent that year.

Table 4
Annual Growth Rate of Energy Use Per Capita

Example: ((1991-1990)/1990) * 100 = per cent change
Average: • (1990-1999) / 6 = -4,78
Source: IEA, International Energy Agency

From 1995 to 1998 Russia increased export of energy by approx. 10 per cent (see table 5) while inland consumption dropped, thus making export of energy an important industry for Russia alongside other industries.

Table 5
Primary Energy Supply, Net Import and Electricity Consumption

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3.2.1.1 Energy Supply and Consumption in Relation to GDP

Table 6 shows that Russia has not been able to decouple GDP generation and energy consumption / production significantly. From 1992 to 1998 Russia reduces the TPES/GDP ratio by approx. 3 per cent.

Table 6
TPES/GDP (toe per thousand 95 USD)

Source: IEA, International Energy Agency

Table 7 indicate that for consumption, being energy available to end users (i.e. industry) the decline was about 9 per cent in the same period. The difference in TPES/GDP and TFC/GDP could mean that Russian industry's part of GDP generation has declined more than can be observed by the TPES/GDP ratio. This actually means that Russia is experiencing a decoupling within the industry sector, which is not shown in table 6. This is due to inefficient extraction, production and distribution of energy (see table 11).

Table 7
TFC/GDP (toe per thousand 95 USD)

Source: IEA, International Energy Agency

3.2.1.2 Energy Supply and Consumption Based on Energy Source

Russia is an exporter of energy (see table 5) and thus produces more energy than needed for inland consumption. Russia has, despite a decline in energy consumption, a large dependency upon fossil fuels (see table 8).

During the period 1992 - 1998, Russia experienced a decline in energy production for coal (25 per cent), oil (48 per cent) and gas (16 per cent)).

Table 8
Energy Supply and Consumption, Primary Supply¹⁵ / Energy Source (Mtoe)

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3.2.1.3 Consumption of Electricity

Final consumption of electricity has also decreased (24 per cent) during the period 1992-1998 (see table 9).

3.2.1.4 Energy Consumption Based on Sectors

Russia experiences, during the period 1992-1998, drastic cut downs in the transport sector (-41 per cent) and in the residential and agricultural sectors (45 per cent)

The industry sector's use of energy declines by about 11 per cent. Despite the drastic fall in energy use within the transport sector, use of energy starts to increase from 1994 and onwards until 1998 by 7 per cent (see table 10). Energy consumption in the transport sector is typically characterized by use of fossil fuels - mainly petroleum.

Table 10
Annual Energy Consumption - Mtie (TFC) Per Sector

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3.2.2 Energy Efficiency

During the period 1992-1998 Russia actually experiences a decline in energy distribution efficiency of about 13 per cent, while most other countries are experiencing an increase (see table 11). As mentioned earlier, Russia has some of the worlds' oldest energy distribution networks, with only 4.5 per cent being less than 5 years old. Large quantities of energy are wasted due to old distribution networks.

Table 11
TPES/TFC

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3.2.2.1 The Importance of District Heating

Heat consumption and production is much more important in Russia than in most other industrial countries, as heat represents 40-45 per cent of final energy consumption, across all sectors, and two thirds or more of energy consumption in the residential sector is used for heat and hot water. (See table 10).

Current privatisation of the residential sector does not lead to automatic energy savings, - as some international institutions sometimes seem to believe. Even where heat and hot water are metered and most residential apartments are privatised, residents may be neither de-jure nor de-facto responsible for maintenance of the buildings, let alone energy efficiency investments. In the very long term, of course, it is possible that future homeowners associations will form and assume such responsibilities. Meanwhile, incentives and responsibility for district heating distribution losses remain institutionally mismatched, as payments are based on the heat leaving the plant rather than what reaches consumers homes and buildings.

3.2.3 Physical Energy Infrastructure

Transneft is the state-owned company responsible for Russia's extensive oil pipeline system. Many of these pipelines are in a state of disrepair; with Fuel and Energy Ministry figures indicating that almost 5 per cent of crude oil produced in Russia is lost through pipeline leaks. Transneft lacks the funding to repair or upgrade many of these malfunctioning pipes, and the company's focus has instead been on building new pipelines. In addition to those in the Caspian Sea Region, Russia has a number of new oil and gas pipelines planned or already under construction¹⁷.

Natural gas is the predominant fuel in Russia, accounting for nearly half of the country's domestic consumption. With 1 700 trillion cubic feet (Tcf) in proven gas reserves, Russia has more than enough for itself, allowing it to export significant amounts of gas. In 1998, Russia produced 20.9 Tcf of gas and consumed only 13.8 Tcf, with the excess 7.1 Tcf exported, making Russia the world's largest gas exporter.

3.2.4 Prices and Regulation

Traditionally, Russian heat consumers have been used to perceive heat as a free good and this historic legacy, as well as incomplete enforcement of dept collection makes domestic energy appear cheaper than its price implies. The Russian government has however decided that during the next 3-4 years, electricity prices must reach a level covering at least production cost. Current subsidies by local governments for heat and hot water are scheduled to disappear by 2003. In a ten-year perspective, it is expected that electricity prices will approach those of the European union. CHP covers 65 per cent of the heat demand in most areas of Russia and heat and electricity prices are therefore closely interdependent.

3.2.5 Environmental Issues

While the 1998 crisis helped reduce air and water emissions, pollutions per unit of GDP has not improved significantly (5 per cent) from 1992 to 1998 (see table 14). Compared to major OECD nations and large developing countries, Russia's carbon emissions rank third, behind the United States and China. In contrast to both these countries however, Russia's emissions dropped from 573.50 million metric tonnes of carbon emitted in 1992 to 407.52 million metric tonnes in 1997 (see table 12). Russia now emits considerably less than its quota under the Kyoto Protocol, and thus have emission credits to trade with Western countries in exchange for much needed hard currency.

The reason behind this reduction was a drop in industrial production and economic crisis, not improvements in energy efficiency (see table 11). Energy and carbon intensities (2.7 metric tonnes of carbon per person) in Russia remain high (see table 13), and while per capita carbon emissions have fallen (approx. 30 per cent) since 1992, Russia will need to improve its "ecoefficiency" to maintain this trend.

Table 12
Carbon Dioxide Emissions from the Consumption and Flaring of Fossil Fuels

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Table 13
CO₂ (kg. of Carbon Equivalent) Per Capita

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Table 14
CO₂ (kg. of Carbon Equivalent) / TPES (Mtoe)

Source: Energy Information Administration, International Energy Agency (EIA).
* Preliminary. (http://fossil.energy.gov/international).

3.2.6 Renewable Energy

Renewable energy in Russia faces a range of constraints on their dissemination. In the first half of the 1990´s Martinot (1998) identified a series of transaction barriers seriously limiting investments in RE and technology transfer. He identified six kinds of barriers that limit energy efficiency and renewable energy in Russia. These include lack of information and issues related to legal and market institutions; contracts and property rights prominently among these. Lack of historical heat consumption data is another problem, and the fact that the link between energy savings at a building, and actual fuel savings at a district heating plant is complex. However, the same author concluded that in Russia:

	Favourable conditions like market level energy prices and privatisation exist.
	Huge technical potentials and economically profitable opportunities exist.
	Russians are highly technically qualified to take advantage of opportunities.
	New institutions and market oriented skills, market intervention and joint ventures are important means of overcoming transaction barriers.

While some Russian technologies may have lower performance than Western European state of the art, a wide range of modern technologies is indeed available in Russia. This includes meters, valves, insulation, sensors, automatic controllers, pre-insulated piping, heat pumps and variable speed drives as well as solar photovoltaic. What many Russians lack, is the market oriented skills and institutions to take full advantage of their technological capabilities; the innovative, creative and experience based ability to turn an idea or design into a reliable, quality commercial product or service (Martinot 1998). Underdeveloped capabilities in this area include: Business management, finance, marketing, creative product development and innovation, quality assurance, economic analysis and legal contracting. In addition, based on detailed analysis of the six barriers, a demand (by concrete RE projects) for the following important functions follows:

	Securing approval and support of government officials
	Finding and matching investment and joint venture partners
	Arranging finance
	Evaluating and verifying information, about partners and projects
	Obtaining information about technologies and markets
	Project identification
	Cost-benefit and risk estimations
	Licensing arrangements
	Trust building
	Contract negotiation
	Preparation of technical specifications and bidding documents
	Bidding and selecting bids for equipment and installations
	Management, supervision and evaluation of projects

3.2.7 The Energy Situation

Russia experienced an economic crisis in 1998 that was accompanied by a decline in energy use, but in the last 3 years Russia has had a positive GDP. Energy use declined by a no less than 26 per cent in the period 1992-1998 and electricity consumption decreased by 24 per cent in the same period. Energy use within the residential and agricultural sectors have also declined, by approx. 40 per cent.Russia is more than self-sufficient regarding energy and thus exports large amounts of energy. Exports of energy accounts for about 40 per cent of Russia's exports earnings.

From 1995 to 1998 Russia increases energy exports by approx. 10 per cent. Due to a large dependency upon export of energy, Russia only manages to increase a decoupling between TPES and GDP by 3 per cent during 1992- 1998, despite the fact that the industrial sector actually reduced the dependency on energy by 9 per cent.

Use of fossil fuels has in general decreased, especially oil and coal has been cut down, while natural gas has only gone down by approx. 16 per cent from 1992 to 1998.

When it comes to efficiency (here illustrated by the TPES/TFC ratio) the situation in Russia actually worsens by 13 per cent during the period 1992- 1998, a fact that probably is due to the old, badly maintained energy infrastructure. This also affects the CO₂/TPES ratio that only improved by about 5 per cent from 1992 to 1998, which is not impressive compared to other countries.

Energy prices in Russia have traditionally been subsidized, but it has been decided that Russia's energy prices should be approximated to EU prices over a 10-year period.

3.3 Geothermal Energy

In Russia, geothermal energy is part of a cultural and historical legacy dating back further than antiquity. The hot waters of Ural gave rise to fairy tales and legends, and Russians associated geothermal waters with A.S. Pushkins poem "Bakhchisarai fountain", Karl Brullovs painting of the same, and Boris Asafiews ballets (Svalova 2000). In 1957 the first boreholes were drilled to explore the geothermal possibilities for electric power use. In the following years several considerable resources were discovered in the area of Kamchatka. Significant GE resources are available and identified, and Russia has a record of GE use. Compared to the conventional energy sources, however, the contribution by GE to Russia's energy supply is very low (0,06 per cent of total electric power), partially due to the economic situation of the country. At 300 MWh installed geothermal (direct heat) power, GE in Russia is dominated by direct use, - primarily in six towns and a number of settlements in Northern Caucasus and Kamchatka, where GE space and district heating supply a total of 220 000 people. In addition GE heat up an area of 465 000 m² of greenhouses.

The case of Russia illustrates the multiple uses that GE direct use can comprise well: greenhouses, soil heating, fish and animal husbandry, cattlebreeding, manufacturing (such as wool washing, paper production, wood drying and oil extraction), various health and recreational uses (hydropathical use, swimming pools) and then not least space heating.

From a technical point of view, Kvistgaard Consult considers the following areas to be the most promising for geothermal energy utilization in Russia:

	European part of Russia
	Northern Caucasus and Dagestan
	Central region (Moscow Artesian Basin)
	Siberia and West Siberian platform
	Lake Bajkal
	Kamchatka
	Sakhali and Kuril Islands

Map of Russian Geothermal Regions

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All these regions are promising for direct use of geothermal resources from a technical point of view. Some are however, - like Western Siberia - , also very rich in natural gas and oil and that hampers development of GE in the said region. Others, - like Kamchatka and the Kuril Islands - , are very remote seen from a Danish perspective. In what follows, therefore, Kvistgaard Consult limits itself to describing and analysing the prospects for GE in the European part of Russia.

Kvistgaard Consult, however, does point the readers' attention to the fact that GE is well developed in Siberia and that IFI´s, such as the EBRD, are supporting GE projects in some of these more remote areas of Russia.

3.3.1 Areas and Projects

Northern Caucasus is the largest region for development of geothermal energy in Russia (Povarov 2000). The geothermal potential of the region (Krasnodar and Stavropol in particular) is stressed by various sources, including Martinot 1998 and 1999. Most of the interesting areas are located in the Dagestan Republic, including two potential sites, Stavropol and Krasnodar. In these areas the Russian share of the population is 90 per cent, in other areas in the North of the region it is about 50 per cent (Dr. Michel I. Saparov, personal conversation at ENIN, Moscow, 26.09.2001). In total, the Dagestan republic has 180 existing wells, with geothermal potential at depths from 200 to 5500 metres. The total amount of resources has been estimated at 4 million m³/day. In contrast, the annual volume used today is only 7.5 million m³. One project, the Pilot Kayasulinskaya GEOPP, seems to be making progress¹⁸.

There are several factors favouring geothermal investments in the European part of South Russia. For instance, compared to the 300.000 living in the Kamchatka region, South Russia has a population of 20 million people. In South Russia, no additional drilling is necessary, since a lot of now abandoned oil and gas wells have already been drilled during the era of exploration for fossil resources, which are now largely exhausted. Since drilling often amount to 50 per cent of project costs, the existing wells reduce project costs very considerably.

Nevertheless, existing geothermal firms in Russia face a difficult situation with GasProm concentrating on gas production only, and the government ministries no longer able to take an active economic role. An additional - technical - problem is that despite the long regional experience in using geothermal energy to heat buildings and greenhouses, the current - old - technology, with mineralised thermal water results in rapid corrosion of heat pipes and heating devices.

On the basis of the analysis presented in this country profile on Russia, the following project activities and tasks may be identified as relevant for promotion of GE in Russia, with particular relevance to Northern Caucasus¹⁹:

	Provision of institutional support and capacity building to strengthen development of efficient RE use in South Russia, and servings it's 20 million plus population.
	Assessment of technological barriers for wider dissemination of RE in south Russia
	Assessment of institutional barriers for wider dissemination of RE in south Russia
	Assessment of economical barriers for wider dissemination of RE in south Russia
	Elaborate mechanism to trade GHG emission quotas and JI projects, to enable local enterprises raised additional funds for local RE projects.
	Identification of the most viable wells for geothermal energy
	Design of a model geothermal heat supply system and plant
	Assessment of the GHG emission reduction capacity relating to development of RE in South Russia.
	Develop a regional training and data centre for RE in South Russia
	Organize a workshop on promotion of RE in South Russia
	Establish institutional and financial RE project implementation mechanisms
	Prepare a regional RE promotion programme, including one focusing on nature reserves, sanctuaries and national parks.
	Undertake public consultations in support of RE programmes.

Implementing agencies in South Russia could include the North Caucasus Higher School Research Centre (NCRC) and the local energy company Geotermneftegas, Stavropolenergy as well as the regional administrations of South Russia.

The Northern Caucasus region embraces two "geothermal" provinces. The first includes the so-called Alpine tectonic unit and the second is called the epi-Hercinian Scythian plate. The Alpine tectonic unit include the administrative regions of Krasnodar and Stavropol (as well as the Adygeya Republic). Drilling that was previously used for oil and gas exploitation densely covers this part of the Alpine areas of Northern Caucasus. Very intensive oil exploration also provided knowledge of the subsurface structures. Because the oil reservoirs are generally exhausted, a high number of wells can be used for geothermal purposes.

In the Krasnodar region, the geothermal reservoir is of confided type with artesian conditions. Thermal waters are present in Mesozoic and Cenozoic multi layer aquifer systems, where water temperatures at 2000 metres are between 80-100ēC. The reservoir is recharged by water with low salinity that precipitates in the mountains and would therefore probably not need to be reinjected into the reservoir. This may lower exploitation costs significantly. In this area, geothermal heat is used in Mostovskoi town, where water at about 80ēC is used for heating greenhouses and cattle farms, and subsequently dumped into the river, after being cooled down to about 20ēC.

From a technical viewpoint, another potential location of geothermal space heating project is located in Stavropol territory near the towns Mineralnye Vody, Pyatigorsk, Georgievsk, and Kislovodsk. One of the constraints on using geothermal heating at these locations, however, can be to obtain the permission for drilling from local authorities, which are obliged by the Russian low to protect resources of mineral waters. The second main geothermal reservoir is confined in the Alpine area of the Northern Caucasus, namely the Khankala, Makhach-kala, Kyasula and Tarumovka areas.

In the Dagestan Republic geothermal energy for district heating has been used for the last 50 years. Some towns like Makhach-kala or Kizlyar have district heating systems, which partly cover their heat demand. In total, geothermal heating is supplied to about 200 000 inhabitants of those towns. Additionally, geothermal heat is utilized in green houses of total surface of about 80 000 m². In Kayasula, located in south part of Stavropol territory close to Dagestan, a project has been planned to utilize high enthalpy geothermal brines for electricity generation. Nearby Neftekumsk is also an interesting area in this respect (See DANCEE Strategic Action Plan, Kayasula Field, Stavropol Region).

In Russia's central region - the Moscow Artesian Basin - the Moscow "syneclise" is a depressed structure of the East-European platform located between the Baltic Shield, Voronezh and the Volga-Ural anticlines. Within this area, in the town of Yaroslavl, some geothermal activity has taken place during the last ten years. One well was drilled to a depth of 2000 m and this well is still fully equipped for use. A full set of confirmative hydrodynamic tests was performed, but possible yields still have to be precisely calculated, as there was no suitable submersible pump. The potential in this area seems sufficiently promising for further studies to be made. As for further technical description of potentials, - water temperature, depth of drilling and geological structure, etc - , the reader is referred to the footnotes.

Table 13 shows the capacities of GE in Russia, distributed according to different forms of direct use. Table 14 displays the number of geothermal wells drilled, for different purposes and include information on wellhead temperatures.

Table 13
Geothermal Direct Uses In Russia (1.01.2000)

        
Table 14
Wells Drilled For Electrical And Direct Use Of Geothermal Resources From January 1^st, 1995 To December 31^st, 1999

   
3.3.2 Organizations Responsible for Geothermal Energy Development

3.3.2.1 Government

At the central level, the Ministry of Fuel and Energy of the Russian Federation plus the Departments of Strategic Development have broad expertise in energy planning in Russia, including the role of renewables such as GE.

The Ministry of Natural Resources may have a role in geothermal projects, as mineral water and other relevant resources are under the control of that ministry.

In Central Moscow Region, the Russian (Krzhizhanovsky) Power Engineering Institute (ENIN) has a grand history as the leading powerengineering institute in Russia. Today, ENIN is also known for its extensive expertise on renewable energy technologies. In Moscow, international and joint venture projects may be coordinated in collaboration with the Centre for Preparation and Implementation of International Projects (CPPI).

Local and regional authorities and state or municipality owned utilities and companies generally lack financial strength. Weak cash flow generation and regulatory risk outside their control, limit creditworthiness.

3.3.2.2 Private Sector

In recent years a number of private companies have become involved in exploration and utilization of GE in Russia. Private companies in the GE sector include Geotermneftegas, Neftegasgeoterm, Geoterm, KamES and Energiya-M. In addition, semi-public enterprises also play a role in development of GE. In Northern Caucasus, the government enterprise Podzemgidromeneral Institute construct installations for extraction of chemicals from thermal brines.

Non-Governmental Organizations (NGO) advocating for development of GE in particular, hardly exist in Russia. Several universities and other research institutions, however, do work to promote GE. GE research in Russia is coordinated by the special Scientific Council on Geothermal Problems, under the Russian Academy of Sciences. Also, the Moscow State University has researchers working with geothermal energy. ENIN, the Power Engineering Institute turned research organization for utilization of renewable energy sources has significant expertise and experience with GE development, including the supervision of the Stavropol Geothermal Pilot Plant in Kayasula. Extensive information about ENIN is available at; www.mtunet.ru/lge.

In Russia, an "Energy Carbon Fund" (ECF) has been set up, under the auspices of the Unified Energy System of Russia (UESR). With 660 000 employees, and partly state owned (53 per cent), UESR control about 90 per cent of heat production in Russia as well as 74 per cent of electricity generation. The ECF is designed as a revolving investment mechanism for implementation of energy efficiency projects in the energy sector and energy saving measures in industry and municipalities. A Council with representatives of the Russian Parliament, Ministries, regional administrations and public delegates governs the ECF. The ECF is meant to perform the following functions:

	Coordination and implementation of GHG emission reductions
	Develop a pilot corporate emission-trading scheme
	Identify, design, finance and implement GHG reduction projects
	Provide the Russian co-financing part of JI projects
	Supervise JI projects and reinvest proceeds from JI
	Prepare a national system of monitoring, reporting, GHG registry and trading.
	Provide legal and methodological support to JI project developers in Russia.

These functions are meant to operationalise Article 6, Article 17 and other articles of the Kyoto Protocol. A GHG reduction project portfolio with an estimated value of more than USD 25 billions has been identified.

3.3.3 Institutional Factors Govering Geothermal Energy in Russia

The link between the economy and the regulatory environment is highly complex. It is evident that the conventional "medicine" of privatisation and subsidy elimination, so often prescribed by international IFIs, does not work in the case of Russia. One reason is inadequate legal and market institutions, and the ensuing need for broad institutional reforms. An institutional (economic) view of Russia there is consequently required. For instance, the many institutional weaknesses mean dependence on other means of transaction and regulation, such as third-party arbitration, emphasis of personal trust and long-term relations. Joint ventures are one important means of overcoming such institutional barriers.

As most other investments, the feasibility and attractiveness of GEinvestments depend on a certain amount of legal and regulatory rules being observed and enforced. In general, the Russian state bureaucracy is said still to be at an early stage of adjusting to the needs of a market economy and the legal situation still best characterized by an "enforcement gap". Civil society is too weak to control the public administration, and the objectives, functions and competences of governance structures are often poorly defined, leaving room for both "discretionary" manoeuvring of bureaucrats and rivalry between different agencies and branches of government. New laws and frequent revisions to existing laws, along with conflicts between local, regional and federal laws, and lack of enforcement mechanisms further add to this problem. On the whole, however, now the Putin government is seen as actively and rather successfully rebuilding the authority of the state and revitalizing Russia's transition to a market economy.

3.3.3.2 Rules Directly and Indirectly Affecting GE

Directly affecting the economic feasibility of GE projects, the programme for economic and social reforms in Russia for 2002, include reduction of government subsidies for heating, and a reform of the state monopolies in the sectors of electricity, gas and transport. In addition, measures to remove inconsistencies between federal and regional regulations have been announced.

The Russian law "on energy efficiency" broadly addresses energy policies and regulation, including metering and billing, energy audits, building codes and education. It also allows for independent energy production in Russia, and should therefore make RE more feasible. The law, however, stops short of detailing the implementation mechanisms needed to allow the kinds of market transactions, at what terms the major power producers is obliged to buy power from other producers.

Federal and regional government energy efficiency funds are financed with taxes on energy sales, and allocated funds to investment projects. By 1995 a few such funds operated successfully.

3.3.3.3 Russia's New Energy Strategy

Russia's long term energy strategy objectives can be summarized as:

	Increased efficiency in the use of fuels and energy resources.
	Improving the conditions for transition to energy efficient development.
	Reduction of the environmental impacts
	Increased volume and potential for energy export.
	Ensure Russia's independence and security in energy supply

In the process of fulfilling and making these goals more concrete it is noticed that Russia is planning a long-term use of nuclear power in order to gradually replace the conventional energy sources. At the same time it is noticed that the country's nine existing plants all are old, and in a matter of years they will exceed their "life expectancy". The nuclear plant in St Petersburg is though - like the other plants - expected to have its "life expectancy" prolonged through additional investments in safety equipment.

A number of the goals mentioned above have already been met. The decrease in production of oil and gas during the recent years has now been stabilized, helped by the prices on oil, which have been high since 1999. Institutional reforms have been carried out, including privatisations, in such a way that the Russian state still has great influence on the development and has a number of regulatory instruments at it's disposal. The coal industry is among the industries in which a restructuring has been initiated. The goal is to obtain a higher cost efficiency. Still it is expected that coal (together with slate oil, peat and wood) will continue to be a cheap source of energy in Russia for a long time. Concerning development and extension of the market conditions on the home energy market, a number of important legal and regulationary steps have been taken, including in the area of taxes, investments and price policies.

Despite signs of economic recovery the output of the energy sector in terms of discoveries of oil and gas and investments have not gone up as much as the strategic plans have forecasted. These strategic goals, therefore, remain goals. Most important, and most surprising, is maybe that the energy intensity of the country hasn't decreased as desired. Actually it has increased by 20 per cent compared to the period before the reform. The aggressive and planned structural changes in Russia are described in a number of Englishlanguage documents²⁰.

3.3.3.4 National Funding Sources for GE Development

The budget for the Russian Federation includes a chapter on South Russia, where a 2002-2004 scheme - by Decree of the Government of the Russian Federation, dated August 8. 2001, # 581, is earmarked for development of renewable energy (Table 4.6.8 of the budget annex). The allocation is 6 million roubles (200 000 USD). In addition, funds from international organizations are envisioned, including support from the GEF. Thus, a proposal for a project: "Promotion of Renewable Energy Development in South Russia" has been given full and official support²¹. This allocation - as well as the similar allocation for an energy savings programme - may be seen in the context of a World Bank study on the promotion of Renewable Energy in Russia, and the so-called "Stavropol Renewable Energy Project". It reflects a stated ambition of the Russian policy to increase renewable energy use several times during the next ten years. This strategy attach much importance to heat supply issues in several regions, and is based on the fact that RE in Russia has a "region specific" nature, with RE resources unevenly distributed across the country. In this strategy, South Russia has been identified as one of the regions where the "economically justified capacity of renewable energy resources is rather large" (ENIN).

The South Russian Renewable energy scheme has the following objectives (according to the plan of the Russian Federation and international investors):

	Implement measures to eliminate barriers to promotion of renewable energy
	Prepare investment projects to ensure utilization of geothermal, solar and wind energy units in South European Russia.
	Prioritise renewable energy supply for state nature reserves
	Review the regional resource base
	Prepare feasibility studies and project documents for RE projects
	Propose a regional training and data centre on RE established
	Develop a concept for establishing institutional and financial mechanisms to implement RE projects
	Arrange an international workshop on promotion of renewable energy development in South Russia.

Among the particular obstacles identified in the Russian development plans, the Russian Power Engineering Institute (ENIN) has emphasized inexperience in the establishment and operation of modern doublecircuit geothermal heat supply systems and binary low-boiling geothermal power plants as major obstacles to a rapid and efficient development of large geothermal energy reserves in South Russia.

3.4 International Collaboration on Geothermal Energy Development in Russia

3.4.1 Danish - Russian Collaboration on GE and Environment

So far, the Danish - Russian collaboration on GE has been explorative. In Kaliningrad, the Danish Energy Agency (DEA) did in September 1994 grant DKK 450 000 for the initial phase of a study titled: "Development of Geothermal Energy in the Kaliningrad Region". The final report is to be issued by Danish Oil and Natural Gas (DONG) in 2001 and will comprise calculations for a row of geothermal case studies. The appendix: "Preliminary assessment of Geothermal Aquifers in the Kaliningrad Region, DONG, 20th February 1996" was made with the assistance of Petroleum Geology Investigators (PGI).

The Baltic Region has priority in the Danish-Russian co-operation and the possibility of using geothermal energy for the supply of heat to district heating networks in the Kaliningrad Region has been preliminary investigated by DONG in co-operation with the Russian company Gas-Oil. The screening phase for geothermal aquifers was reported on in February 1996. Information about district heating network conditions has been gathered and options for the construction of a demonstration plant has been discussed since then. The project has received local support, but the central government has given it low priority due to the possible existence of more obviously suitable locations for geothermal plants in Russia, and the project has only progressed slowly. The present status for the project is, that some sites have been selected for a more detailed evaluation/demonstration project.

3.4.2 The World Bank Group

Acting on a request to undertake a study of potential geothermal energy development in Russia, the World Bank recently carried out a study, focusing on identification and removal of institutional and technological barriers for broader utilization of this form of energy (Aide Memoire, 2000). The bank sent a fact-finding mission to Russia in May 2000 to obtain basic information about certain proposals and potential project ideas. The mission met representatives from the Russian Academy of Sciences and Ministry of Fuel and Energy and discussed the available material on geothermal energy in Russia.

The development of non-traditional energy sources on the basis of geothermal fields of Russia is one of the priority purposes of long-term cooperation between the Russian Ministry of Energy and the World Bank on the problems of GHG emission reduction.

3.4.3 The EBRD

While stressing that the sustainability of the impressive recovery strongly depends on the continuation of systemic reforms, the EBRD view of Russia is sufficiently optimistic for the bank to have announced a step-up of its activities, including those in the infrastructure and environment sectors. As far as the latter is concerned, the EBRD foresee collaboration with grant donors, in projects with "environmental rationale". The bank sees such projects as requiring a pro-active approach, and as being contingent on availability of donor grant funds being offered to partially cover investments. While EBRD commitments and disbursements to Russia may appear moderate in recent years, the level of investment is picking up again now nearing the precrisis level. Thus, during the first half of 2000, the bank signed investments in Russia totalling EURO 263 million, expecting a full-year commitment of up to EURO 750 million. In addition to the investment projects, the Bank administered 441 technical cooperation projects with a total of EURO 216 million made available by other donors.

In Kamchatka, the bank is involved in exploration and use of geothermal resources, which exceed several times the regional needs and amount to an electrical capacity 2 000 MW and a thermal capacity up to 5 000 MW. One rationale behind GE in that regions is that tariffs for power are the highest in Russia and are considerably higher then those in the world, today up to 12 cent/KWh. In the Kamchatka GE projects, the resulting decrease of CO₂ discharges are being prepared for sale at international market as a part of Russian quota.

"Geotherm" PC, together with RAO "EES of Russia", EBRD, with the support of the Government of Russia and the administration of the Kamchatka region, realizes the large power project (Mutnovsky GeoPP 50 MW) according to international rules for the first time in Russia. A license (for 30 years) for Mutnovsky steam field (> 300 MWe) has been sold or issued to "Geotherm" PC.

3.4.4 The Position and Potential of Danish Companies in Russia

The potential for Danish involvement in development of GE in Russia is high. Staff of the Danish Company Houe & Olsen recently participated in a World Bank Geothermal project identification mission to Russia and DONG is also active in terms of collaboration with Russia. Among the activities carried out by DONG in Russia, is a technical study of the prospects for GE in the Kaliningrad region. Further, the Danish Consulate General in St. Petersburg is actively involved in advising initiatives in GE, as part of its general responsibility.

3.4.5 The Level Of Competence, Local Companies

Martinot (1998) stresses that Russia's technological infrastructure, scientific and technical knowledge, engineering and technical skills, factories and equipment are all well developed. Russia's capacity to develop and produce energy efficiency and renewable energy technologies are excellent.

3.4.6 The Role of DANCEE Local Project Coordinators

The DANCEE has appointed both a Programme Coordinator (PC) for the Federation of Russia (based in Copenhagen, DEPA) and a Local Project Coordinator (LPC) for the NW Region of Russia (based in Russia). In addition, activities in St. Petersburg and Kaliningrad are coordinated by another PC, also based in Copenhagen (DEPA).

3.4.7 Co-Financing Options and Record of IFI Collaboration

The options for co-financing between DANCEE and IFI´s are very clear in the case of Russia. Besides the EBRD involvement in Kamchatka, the World Bank is promoting renewable energy projects and geothermal energy prefeasibility studies in the European part of Southern Russia. Meanwhile - in pace with the enlargement of the European union - NEFCO is expected to gear up its activities in Russia.

3.5 Summing Up

Following the 1998 economic crisis, Russia entered into a process of structural changes and economic reforms. While the Russian government still has significant influence, the formerly state owned energy sector is developing independently. The implementation of new energy laws in Russia, have indirectly improved, if not the immediate conditions for geothermal project investors, then at least set in motion a long term process that will eventually do so. The new laws have opened up for more market-based competition between different sources and will remove some of the indirect subsidies that currently distort the energy market and disfavour renewable resources.

The technical potential for GE in Russia is much greater than what is currently being utilised. Geothermal studies have been performed in a large number of Russian cities, involving a high number of scientific institutes and a handful of universities and project implementation agencies. Also the human resource base in Russia is well developed in terms of qualified thermal engineers and geologists. A number of potential geothermal sites have been clearly identified, with favourable characteristics in terms of high water temperatures at relatively shallow depths.

In Kaliningrad and St. Petersburg, the geo-technical potential is currently not as convincing as in other Russian regions with geothermal potential. Kaliningrad, however, is in a special situation with a large regional energy deficit and more in-depth studies on the hydro-geology of the region might be relevant, focusing on Kaliningrad City and the City of Sovetsk.

In the Northern Caucasus regions, a majority of the technical potential exists in areas, where no drilling is needed due to existing boreholes left over from oil and gas exploration. Further, such conditions exist in some of these areas that makes it possible to avoid reinjection costs. The same region features some cities with long term experience within geothermal energy heating applications, and the whole region - as most of Russia - has existing district heating systems. In general, the Northern Caucasus region is striving to develop and introduce more renewable energy, particularly in nature parks and reserves in the mountain region.

One potential barrier to GE in Northern Caucasus (as in Russia in general) is the bad shape of existing district heating networks. Another barrier to GE - and RE in general - is the historically low energy prices, which still are relatively (and perhaps artificially) low despite recent price hikes and exhaustion of the regions fossil resources.

In Russia, the work on joint implementation for GHG emission reductions is progressing fast towards signing of an intergovernmental MOU. The MOU will feature agencies mandated for joint working group cooperation, an internationally recognized system for reporting to the UNFCCC and implementation of JI projects and programmes.

Russian municipalities are struggling in these years with the existing old district heating systems. It is unclear to what extent the municipalities of e.g. the Krasnodar and Stavropol (Northern Caucasus) regions are able to commit themselves financially to geothermal project investments.

In the process of supporting geothermal energy in Russia, it is important to acknowledge that the current privatisation of the residential sector does not lead to automatic energy savings, - as some international finance institutions sometimes seem to believe. Even where heat and hot water are metered and most residential apartments are privatised, residents may be neither dejure nor de-facto responsible for maintenance of buildings, let alone energy efficient investments. In the long term it is possible that future homeowner associations will form and assume such responsibilities. Meanwhile, incentives and responsibility for district heating distribution losses remain institutionally mismatched, as payments are based on the heat leaving the plant rather than what reaches consumers buildings.

3.6 References

IEA. 2000. Energy Strategy of Russia for the period ending 2020. Main Provisions. Draft, March 2000. Moscow.

Kononov, Vladimir, Boris Polyak and Boris Kozlov. 2000. Geothermal Development in Russia: Country Update Report 1995-1999. World Geothermal Congress, Proceedings, Japan.

EBRD. 2001. Strategy for the Russian Federation.

The World Bank. 2000. Russia: Geothermal Projects. Aide Memoire. Draft Working document.

Britvin et al. 2001. The Mutnovsk Geothermal Power Complex in Kamchatka. In Thermal Engineering. Vol. 48. N0. 2. 2001. pp 89-95.

Povarov, Oleg A. 2000. Geothermal Power Engineering in Russia - Today.

Martinot, Eric. 1998. Energy efficiency and renewable energy in Russia. In Energy Policy, Vol.26 11.

Martinot, E 1999. Renewable energy in Russia: markets, development and technology transfer. In Renewable and Sustainable Energy Reviews, # 3, 1999.

Svalova, Valentina. 2000. The history of geothermal resource use in Russia and the former USSR. WGC proceedings. 2000. Japan.

3.7 List of Institutions Visitet and Individuals Met

The Danish-Russian Institute for Energy Efficiency (RDIEE)
Mr. Alexander Krolin.

S.C. Geotherm
Dr. Grigory V.Tomarov, Director General

Power Engineering Institute (ENIN)
Dr Michel I. Saparov - Centre for Preparation and Implementation of International Project in Technical Assistance.
Mr. Vladimir Kabakov, Marketing Department, Manager
Dr. Viktor

Energy Carbon Facility
Russian JSC "Unified Energy System of Russia"
Mr. Yuriy Fedorov

Ministry of Fuel and Energy of Russian Federation,
Dr. Prof. Alexey M. Mastepanov, Department of Strategic Development
Mr. Gennady Alexandrovitch Pavlov, Department of Research and Development.

Trade Federation of the Russian Federation in Denmark.
Mr. Igor S. Zhokin

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