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Part III: Efforts to Promote Research and Development of Fast Reactors

Fast neutron reactors (FNRs or fast reactors) which burn uranium more efficiently have a very high energy production rate compared to conventional power reactors.  A fast  breeder reactor (FBR) is designed to produce more plutonium than it consumes as fuel.  According to the Argonne National Laboratory, “the fast reactor can create new fuel and destroy long-lived nuclear waste and plutonium while it produces electricity.”

The first U.S. prototype fast breeder reactor (Enrico Fermi, 66 MWe) operated for only three years and was shutdown for safety reasons in 1972.  U.S. efforts to advance FNR technology have been constrained by several factors, including the high costs of building and operating prototype fast reactors, technical failures of the earliest reactor designs both in domestic programs and abroad, a lack of U.S. public support, and, most importantly, proliferation concerns due to “the plutonium content of the spent and reprocessed fuel.”  U.S. research in the field of fast reactor technology continues, and there are now plans for the “deployment of prototype fast reactors between 2018 and 2025.”  However, the lack of Congressional support and appropriations for advancing FNR technology has been criticized by supporters of nuclear energy.

Currently, Russia is the only country with an operating commercial fast reactor (BN-600, 600 MWe).  According to the DOE Energy Information Administration, this reactor is “regarded as highly reliable.”  France closed its remaining fast reactor (Phenix, 250 MWe, 1973-2009) last year.  Japan has an experimental fast breeder reactor (Joyo, 140 MWt), which has been operating since 1977, and may restart a prototype fast breeder reactor (Monju, 280 MWe) in 2010.  India has a fast breeder test reactor (FBTR, 40 MWt) which has been operating since 1985 and is constructing a prototype fast breeder reactor (PFBR, 500 MWe) scheduled for completion at the same location in 2011.  Today’s critics of plutonium-fueled fast breeder reactors argue that Russia and India’s breeder reactor programs “leave much to be desired regarding the availability of data on reliability, safety and economics.”

Russia’s BN-600 reactor is a sodium-cooled fast breeder reactor (housed at Beloyarsk Unit 3) located at the Beloyarsk Nuclear Power Plant in the town of Zarechny, Sverdlovsk Oblast.  It has been supplying electricity to the Middle Urals power grid since 1980 and “is said to have the best operating and production record of all Russia’s nuclear power units.” A large sodium leak in 1993 was reported to have had “negligible radiological consequences.”  The BN-600 power unit was upgraded and received a license in April 2010 for 15 more years of operation.           

Russia plans to commission the first BN-800 fast breeder reactor (housed at Beloyarsk Unit 4) in 2014.  The new design of the more powerful (800 MWe) reactor offers fuel flexibility (U+Pu nitride, MOX, or metal fuels), enhanced safety, and improved operating costs.

Both the BN-600 and BN-800 reactors will be used in Russia to burn the country’s surplus weapons-grade plutonium as MOX fuel within the framework of the Plutonium Management and Disposition Agreement (PMDA).  According to the bilateral agreement, they will be modified to dispose of plutonium “without creating new stocks of separated weapons-grade plutonium.”

In October 2009, Russia’s Atomstroyexport signed a contract to carry out pre-project work for construction of two power units with two BN-800 reactors in China.  Construction of the first unit is scheduled to begin in 2011.  The contract was concluded with the China Institute of Atomic Energy and with the China Nuclear Energy Industry Company.

Russia also has two lead-cooled fast reactor designs that can be applied commercially and are considered to be more proliferation resistant: the BREST fast reactor of 300 MWe and the Lead-Bismuth Fast Reactor (SVBR) of 100 MWe.   

In 2008, Rosatom and Russian Machines set up a joint venture to design and build a prototype 100 MWe SVBR reactor.  According to an Atomenergoprom presentation, the plan is to build the SVBR-100, test it, obtain licenses, and complete a new nuclear power plant with the SVBR technology by 2020.  In 2009, Rosatom also set up a 50/50 joint venture with En+Group to design and produce a prototype SVBR reactor, as well as to obtain licenses.  This pilot project is a public-private partnership.  According to a Rosatom 2009 press release, the joint venture, OJSC AKME-engineering, is tasked with “completing R&D for the project.”  The SVBR-100 reactor unit is “scheduled to be commissioned around 2019.”

Dr. Ehud Greenspan of the University of California, Berkeley, Department of Nuclear Engineering, suggests that the United States should consider basing an American prototype reactor on the Russian SVBR-100 technology and cooperating with Russia in further developing this lead-cooled fast reactor (LFR) technology. 

Click here to read Part I of U.S.-Russian Cooperation in Nuclear Energy.

Click here to read Part II of U.S.-Russian Cooperation in Nuclear Energy.

The Importance of the US-Russia 123 Agreement

The Agreement between the Government of the United States of America and the Government of the Russian Federation for Cooperation in the Field of Peaceful Uses of Nuclear Energy (also known as the 123 Agreement) serves not only non-proliferation, but also the commercial interests of both countries.  Signed in Moscow in May 2008 and submitted to the U.S. Congress the same month, the Agreement was withdrawn after the Russia-Georgia military conflict in August 2008.  At the July 2009 Moscow Summit, Presidents Obama and Medvedev issued a joint statement  repeating earlier U.S. and Russian support for the 123 Agreement.  Opposition in Congress to the Agreement has been primarily linked to Russia’s stance on Iran’s nuclear program, particularly its past reluctance to support crippling sanctions against Iran. 

However, in the transmittal message to the U.S. Congress, President Obama noted that the United States and Russia “have significantly increased cooperation on nuclear nonproliferation and civil nuclear energy” in the last year.  The President urged the Congress to give the proposed Agreement favorable consideration because of Russia’s expressed support for a new United Nations Security Council Resolution on Iran, the April 2010 signing of the START Treaty and the Protocol to amend the 2000 U.S.-Russian Plutonium Management and Disposition Agreement, as well as Russia’s support for other non-proliferation initiatives, such as the establishment of an international nuclear fuel reserve in Angarsk, Russia.

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The United States and Russia are leading players in the nuclear energy global market.  Nuclear power accounts for approximately 20 percent of electricity generation in the U.S. and 17 percent in Russia. (Nuclear power is used by 31 countries and accounts for about 16 percent of the world’s electricity generation.)  In absolute terms, however, the U.S. produces five times more electricity from nuclear power than Russia does.  Looking ahead, both countries face a growing demand for electricity and pressure for energy efficiency.  Moreover, their commitment to halting nuclear weapons proliferation in the world gives them an additional incentive to limit the use of materials that could be used for weapons fabrication. 

At present, civilian nuclear cooperation between the United States and Russia is very limited, tied primarily to proliferation concerns and conversion of nuclear stockpiles.  Broadening civil nuclear cooperation will depend in large part on the 123 Agreement for peaceful nuclear cooperation entering into force.  (This Agreement, signed by the Bush Administration in May 2008, was resubmitted to the Congress by the Obama Administration on May 10, 2010.) 

The three-part series on this topic explores the present state of U.S.-Russian nuclear cooperation, the important role the 123 Agreement can play in fostering cooperation, and efforts in both countries to promote research and development of fast neutron reactors.

Part I:  U.S.-Russian Cooperation in Nuclear Energy: More to Be Done

Ongoing US-Russian nuclear cooperation has two dimensions: a broad focus on enhancing nuclear security and a more limited development of commercial activities.  Various activities have been undertaken under Congressionally-funded threat reduction programs to reduce the likelihood of nuclear materials falling into the wrong hands, including U.S. funding for security upgrades at Russian nuclear warhead storage sites to improve “protection, control, and accounting of” Russian nuclear weapons and materials.

The development of cooperation dates back to the signing of a February 1993 agreement under which Russia agreed to blend down highly enriched uranium (HEU) from Soviet nuclear warheads and to sell the resulting low enriched uranium (LEU) for use in the U.S. civilian nuclear industry.  The HEU Purchase Agreement, which established the 20-year, $8 billion Megatons to Megawatts program, provided for such one-way trade until 2013.  As of the end of 2009, Tenex, a Russian government-owned entity, had sold approximately 72 percent of the total amount of LEU that both sided agreed to be sold over the lifetime of the agreement to USEC, the program’s executive agent for the United States. (USEC is now a privately-owned corporation.)  This program has met a significant share of U.S. nuclear fuel needs, contributing to the generation of about 10 percent of electricity output in the United States.

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To view Part I of “Update on Developments in Russia’s Renewable Energy Sector,” please click here.  

Investment in Renewable Energy

After the 2008 announcements and proposals calling for increased investment in production of solar products in Russia (see earlier ClimateIntel postings), some steps were taken by the government and by industry.  For example, Nano Solar Technology (NST), created in June 2009, undertook a solar module project in the Republic of Chuvashia.  This 49/51 joint venture is owned respectively by Russian state corporation Rusnano and the Renova Group of Companies.  Oerlikon Solar has been chosen to provide a 120 MW end-to-end line for the production of thin film modules.   The equipment is scheduled to be delivered to a new production facility located on the territory of the chemical plant “Khimprom” (city of Novocheboksarsk) in 2010, with production scheduled to start in 2011.  This project will significantly increase the production capacity of the Russian PV market.  Ryazan Metal Ceramics Instrumentation Plant in Ryazan Oblast is already using a 12 MW module manufacturing line supplied by Spire Corporation. Bogoroditsk Plant of Techno-Chemical Products in Tula Oblast also received a solar module manufacturing line from Spire Corporation last year (see previous ClimateIntel postings).  Both Russian plants are daughter companies of the holding company OJSC Russian Electronics, which is controlled by state corporation Rostekh.

Some investments have also been undertaken in the nascent biofuel sector.  OJSC RT-Biotekhprom, a wholly-owned holding company of state corporation Rostekh, announced plans to produce biofuel pellets and butanol in Arkhangelsk Oblast.  The wood pellet facility will have an annual capacity of 150,000 tons and is expected to be completed in Fall 2010.  The head of RT-Biotekhprom also heads an affiliated company — OJSC Biotechnologies Corporation — which is developing plans to produce two million tons of biofuel additives for motor fuels (gasoline and diesel) in the future.

The Ministry of Regional Development in September 2009 discussed a major project to promote energy efficiency in Arkhangelsk Oblast.  This project seeks to convert boilers from coal and diesel to biomass (from readily available wood waste in the region) and to set up production of biofuel pellets.   

As concerns hydropower, the development of small hydro power plants in the country appears to have slowed.  The fund “New Energy” created in early 2007 to implement RusHydro’s 2006 program for building small hydro power (SHP) plants with new capacity of up to 300MW by 2010, has been unable to handle the task, according to a source familiar with the situation.  In 2008, the fund’s portfolio included 383 prospective SHP projects with total capacity of 2.1 GW.

Prospective wind power projects are also in the news.  In 2009, the Russian daughter company of Canada’s Greta Energy Inc announced plans for a 72 MW wind project in the Yeisk district of Krasnodar Krai and began negotiations with manufacturers of wind turbines and related equipment.  The company plans to put three wind power facilities into commercial operations in early 2012.  According to a media report, Greta Energy “plans to invest up to €250 million in its first wind farm” near Russia’s Black Sea coast.  The Russian daughter company of The Netherland’s Windlife Energy is the leading developer of a 200 MW wind farm project (with 100 wind turbines) in Murmansk Oblast. This project is expected to be fully completed by the end of 2013.  Various wind power projects, as well as challenges facing the industry, were discussed during the first national conference held by the Russian Wind Industry Association in mid-November 2009. 

It may not take long before Russian hydrocarbon companies also begin to invest in domestic wind power projects.  For example, LUKOIL, citing the Yeisk project, has publicly expressed interest in a pilot project proposed near the city of Lagan on the Caspian Sea. 

However, it is less certain that the country’s wind-power capacity will reach the goal presented by RusHydro in 2008 to increase wind power capacity tenfold (from an estimated 12 MW in 2005 to a target capacity of 120 MW in 2010).  The federal government’s January 2009 decree did not include specific percentages for each type of RE input (i.e., small hydro, wind, solar) to be used in electricity generation.  Specific targets were in a draft decree, but these were later removed, according to a person familiar with the situation. 

The future development of the renewable energy sector depends on the Ministry of Energy speeding up work on developing and adopting additional RES regulations responsive to the market.  Currently, the number of finalized projects is small and the amount of government support for renewable energy is quite limited - especially when measured against the huge amounts allocated for gas and oil development projects.  It will take not only the passage of new laws and favorable regulations, but also a long-term political and financial commitment to further develop the renewable energy sector before one can speak of “breakthroughs” in this area.

Additional legislation and executive branch implementing regulations will be required to boost substantial private investment in domestic renewable energy (RE) projects inasmuch as  private investment in this area will follow - not precede - the federal government’s investment in major projects.  Private Russian companies will nevertheless continue to undertake feasibility studies as they await federal legislation, as well as the development of specific regulations as required by certain provisions of the 2007 federal law “On Electric Power.”

Electricity Generation

In April 2008, the Chairman of the State Duma Energy Committee spoke of the need for the federal government to develop and introduce regulations based on the 2007 law “On Electric Power” concerning RE pricing and economic incentives, and to articulate “clear economic rules” for attracting investors.  Subsequently, the federal government issued an important decree on June 3, 2008 (№426) for determining the qualification of generators that use renewable energy sources (RES).  On November 17, 2008, the Ministry of Energy issued a regulation (№187) for the issuance, transfer and redemption of renewable energy certificates (RECs).  This regulation, which came into force on February 27, 2009, is likely to be reworked in 2010.  The executive directive issued on January 8, 2009 outlined the federal policy on the use of renewable energy for electricity generation and tasked the Ministry of Energy with developing regulations and other follow-up actions (see previous ClimateIntel posting). 

According to Anatoly Kopylov, Vice President of the Russian Wind Industry Association (RAWI) and a leading expert on renewable energy policy issues, a series of regulations still need to be developed and adopted detailing RES provisions and the requirements of the 2007 law.   Some concern mark-ups for electricity generated from RES, as well as the volume of electricity to be purchased on the wholesale market.  Other regulations concern “rules, criteria and procedures for providing federal budget subsidies to compensate costs associated with connecting RES generators of up to 25MW” to the grid.

The draft bill “On Heat Supply” (#177427-5), introduced in the State Duma in March 2009, was passed in a first reading on November 11, 2009.  Although “renewable energy sources” (RES) are not specifically mentioned in the text of the proposed legislation, the Ministry of Energy’s website comments that the draft bill envisions “measures for development of RES in the area of heat supply.”  Amendments and comments are to be submitted to the State Duma Energy Committee by February 10, 2010.

It is interesting to note that Russia’s efforts to create a legislative framework and regulations for renewable energy have been paralleled by Kazakhstan.  Legislation adopted earlier by Kazakhstan “On Support for the Use of Renewable Energy  Sources” was signed into law in July 2009.  Work on relevant regulations in Kazakhstan is currently under way.

Alternative Fuels

The draft bill “On the Use of Alternative Motor Fuels” (#130858-4), initially introduced in the State Duma in January 2005, has been revised for a third time by the authors and reviewed by the State Duma Energy Committee, which is overseeing this initiative.  On October 9, 2009, the Energy Committee sent the draft bill to the State Duma Council.  According to the draft ruling posted on the Duma website, the State Duma Council recommended that the draft bill be resent to the State Duma Legal Department, the Presidential Administration, the Cabinet, and various committees of the Russian parliament for comments and suggestions.  One criticism already received by the Energy Committee notes that the draft bill does not address the issue of “mandatory certification of alternative motor fuels” as they relate to current emission requirements.  The text of the draft ruling of the State Duma Council suggested that the Energy Committee receive feedback until November 13, 2009 and that the Committee should then prepare the draft bill for a first reading during the spring (January-July 2010) Duma session.

Although more than two years have passed since a legislative initiative on biofuels was announced, the fate of the draft bill, “On the Bases for the Development of Bioenergy in the Russian Federation,” is not clear.  Presented as a joint effort of both the Ministry of Agriculture and the Federation Council Committee on Economic Policy, the text of the 2007 draft bill has still not been posted on the State Duma website.  The head of the Bioenergy Development Center at the state-owned Russian Research Institute for Mechanization in Agriculture recently announced that the Agriculture Ministry had contracted the Institute to work on the draft.  Thus, it is not clear who is ultimately responsible for the introduction of this draft bill in the Duma.  In an interview with the “Regions of Russia” journal (Issue #9, September 2009), the head of the Center noted that the steps required for “mass production of equipment for bioenergy projects in Russia” have still not been taken and that the country’s “mechanical engineering is not ready to participate in the development of the new industry.”

There is no internal momentum for developing biofuel technologies in Russia and the country must rely on foreign technology in this area (as in many other areas) for launching domestic projects - despite the fact that in late 2007 then-President Vladimir Putin stressed the need to create conditions for private companies to produce biofuel in Russia (see previous ClimateIntel posting).  One of the drags on progress in this area is opposition - possibly from the Ministry of Finance - to lowering the excise tax on biofuel for domestic use.

As in the electricity generation area, Kazakhstan is developing a draft law “On State Regulation of Production and Turnover [Sales] of Biofuel,” which was approved by the lower house of the Kazakh parliament in a first reading in May 2009 (see previous ClimateIntel posting).  A related draft law outlining serious penalties for violations of the law was also approved.

The Russian executive branch continues to voice support for the development of the nascent renewable energy sector.  As concerns biofuel development in Russia, President Dmitry Medvedev said at a September 2009 meeting of the Commission for Modernization and Technological Development of Russia’s Economy that Russia has “made some advances here but [we] have few results to show for it so far,” adding that “this is something that requires very detailed preparation, but it is nevertheless important for our country.”  It is not clear whether the President’s objective assessment of the situation will lead to accelerated work at lower levels in federal ministries and agencies, given the severity of the economic downturn and the many other areas in which the Russian economy is lagging or underperforming.

To view Part II of “Update on Developments in Russia’s Renewable Energy Sector,” please click here.

In our final installment examining the issues surrounding the creation of a Russian biofuels market, we examine the “green shoots” of a nascent industry-domestic production for export and domestic interest in development of an industry.

The Russian National Biofuels Association, which monitors biofuel developments in the country, held the IV International Conference “Fuel Bioethanol 2009″ in mid-April 2009 in Moscow.  Aleksey Ablayev, president of the Association, noted on the sidelines of the conference that there is still strong opposition to the creation of a grain-based ethanol market in the country and that much of the discussion today has shifted to cellulosic biofuel.  Projects in this area do exist, though funding difficulties in particular have affected their ongoing pace  in various parts of Russia.

The most recent and ambitious biofuel initiative was launched by OJSC Biotechnologies Corporation, which is controlled by the state corporation Russian Technologies (Rostekh).  Having acquired the Tulun Hydrolytic Plant in Irkutsk (Eastern Siberia), the corporation last September produced and tested experimental butanol as a fuel additive in cars.  No information has been provided on the total cost of the butanol as compared to the cost of gasoline sold locally, nor is it clear whether the chosen method of producing butanol is cost efficient.

Titan, an Omsk Group of Companies, reportedly completed the construction of a grain-based ethanol plant in Omsk. This export-oriented project was launched in 2006, with an initial plan to build a production capacity of 150,000 metric tons of ethanol per year.  (A Czech company, Alta, was chosen as an equipment supplier for the plant.)

Funding Difficulties Slow Biofuel Projects 

A  plan to produce about 30,000 tons of butanol at the Tulun plant (in addition to other products) reportedly had difficulty last year obtaining the funds needed for the purchase and installation of equipment.  Biotechnologies Corporation also announced plans to set up butanol production at other sites, including at existing hydrolytic plants, by 2017.  The corporation’s long-term plan is to attract about $1.5 billion for its biofuel initiative.  If implemented as planned, this initiative would produce about 2 million tons of butanol annually.  The corporation reportedly has asked the authorities for subsidies, including reductions in future profit and property taxes during the initial investment period.

Bioethanol Ltd, a daughter company of the agricultural firm “Vinogradov,” launched a project in 2007 to construct a bioethanol plant in the Lipetsk Special Economic Zone, but halted construction in 2008, reportedly due to funding difficulties.  The initial plan was to produce wheat and/or corn-based ethanol as a biofuel additive.  The Moscow Oblast-based engineering company NPK Ekologia announced in April 2009 that it had an order to do the planning for a project with a production capacity of 250,000 tons of bioethanol per year in Tambov Oblast (in the Western part of Russia), and another order for a project with a capacity of 200,000 tons in Stavropol in Southern Russia.  The country’s financial crisis may put a hold on these projects as well.

Non-Food Based Biofuels

Several Russian companies have expressed interest in biodiesel.  For example, in May 2008, the Konti Group of Companies said that it was interested in producing rapeseed-based diesel in Ivanovo Oblast.  The plan was to construct a plant with an annual production capacity of up to 200,000 tons of biofuel.   In June 2008, the Masloprodukt Group of Companies signed a memorandum of cooperation with the National Reserve Bank (NRB), with the goal of increasing production of sunflower-seed oil at an existing plant in Voronezh Oblast.  The Masloprodukt-Bio initiative envisioned an annual production capacity of 100,000 tons of biodiesel and 10,000 tons of raw glycerin.

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In this, our second post on the issues surrounding a biofuels industry in Russia, we examine the attempts by the Russian political class to overcome the various policy barriers we outlined in our last installment.

For several years, the Russian political leadership has given rhetorical support to the idea of developing the domestic biofuel sector, but this has not followed that rhetoric with the new laws required to jump-start growth. While cabinet members made promising announcements on renewable energy and parliamentarians submitted drafts of biofuel laws, few results ensued.

The Agriculture Ministry under Aleksey Gordeev was a strong advocate of biofuel legislation.  In 2007, the Ministry made projections for biodiesel demand in Russia linked to the growth in rapeseed production and listed twelve cities as sites for future biofuel production.  Several Russian regions, including Tatarstan, announced pilot biofuel projects and called attention to the need for legislation that would open the door to biofuel businesses.  In late November 2007, President Vladimir Putin told Gordeev that business conditions to produce biofuel in Russia needed to be created.

In February 2008, the federal government approved the technical requirements for gasoline and diesel that allow the use of bioethanol as an additive for up to five percent.  (Russian law does not mandate the use of biofuel as an additive.)

In early March 2008, Chairman of the State Duma Boris Gryzlov said at a meeting with President Vladimir Putin and Duma faction leaders that 20 million hectares [about 49.4 million acres] of agricultural land were not currently being used, and that almost half of this land “could be used to produce biofuel, such as biodiesel and bioethanol.”  Following Gryzlov’s speech, the President called on the government to make use of the country’s comparative advantage in arable land.

The following day, Prime Minister Viktor Zubkov (currently first Deputy Prime Minister) announced that there was a proposal to finance the construction of 30 new bioethanol plants to eventually increase the country’s ethanol production to 2 million tons per year.  (By early 2009, production of industrial-grade and food-grade ethanol stood at about 0.6 million tons[1])  Mr. Zubkov did not anounce a time period for completing this program.  It is not clear whether such a federal biofuel funding program exists today or if it was ever been approved by the Cabinet.

Nikolai Ryzhkov, Chairman of the Federation Council Committee on Natural Monopolies, wrote in a December 2008 article that his Committee would “pay special attention to expanding the range of alternative energy sources.”  He praised the first results of experimental production, including the use of wood-based butanol produced at a biotechnology plant in the city of Tulun (Irkutsk Oblast).  The legislator also emphasized the urgent need “to prepare the legislative base for a biofuel industry.”

Despite such high-level support for biofuel initiatives, efforts to pass legislation based on a draft bill “About Alternative Motor Fuels” (#130858-4) introduced in January 2005 did not succeed.  The Government put the bill on hold on the grounds that it did not clearly address, among other issues, issues of jurisdiction and responsibilities of regional and/or federal authorities.  Subsequently, the Duma Energy Committee called upon the authors of the 2005 bill to amend the text in line with previous criticism by the State Duma’s Legal Department.

State Duma deputies and Federation Council members with the backing of the Ministry of Agriculture prepared another draft bill, “About the Bases for the Development of Bioenergy in the Russian Federation.”   This bill, submitted to the State Duma in Spring 2007, was scheduled for review by the Duma Agrarian Committee in 2008.  According to the Deputy Chairman of the Committee, work on the draft bill will continue in 2009.

Legislative and ministerial work has gone very slowly in part because of the regulatory and technical issues that must be addressed.  There are also broader reasons for the lack of progress.  First, renewable energy sources, including biofuel derived from grain or bio-waste, are a low priority on the legislative agenda, especially compared to the regulation of the gas and oil sectors.  Given the heavy dependence of the country on revenues from hydrocarbon production, this is quite understandable.  Second, there is limited interest in alternative energy in general and no desire on the part of business to jump into risky projects.  Third, the financial crisis has shrunk the pool of available investment for all types of energy projects.

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[1] Two million tons of ethanol is about 2.5 billion liters. For comparison, Canada’s annual ethanol production was over 1 billion liters in 2008.  The United States produced about 9.2 billion gallons of ethanol the same year or 34.8 billion liters.

A global financial crisis and the subsequent economic slowdown in Russia have dampened Russian companies’ investment and plans to invest in the biofuel business.  Unlike in the West, Russia is not pushing to get on the biofuels bandwagon.  Yet, despite the many existing constraints on the development of the country’s infant biofuel sector, opportunities to develop this sector do exist.  In this series of posts, we examine the factors constraining a Russian biofuels industry, and the possibilities for overcoming those obstacles and developing a nascent market. In this first post, we examine the production and policy constraints on the industry.

Supply & Demand

On the supply side, Russian agriculture, as well as the forestry and the chemical industry could provide necessary inputs and labor under favorable conditions (such as subsidies in the form of production and blending tax credits).  The potential of the country’s idle distilleries could also be utilized. Grain-based ethanol (which can be produced from non-food grade grain), cellulosic ethanol (using wood waste, straw, etc.), or biobutanol (often called “a second-generation fuel” produced from the same feedstocks as ethanol) can be mixed with conventional gasoline. 

A 10-percent biofuel additive would work for most new cars.  Russian experts’ proposals have ranged from a 5 percent to 10-percent blend of ethanol.  The issue of how much biofuel should be blended with conventional gasoline has caused a debate even in the United States. In 2008, about 9 billion gallons of bioethanol were blended into U.S. transportation fuels in compliance with EPA’s mandated volume/RFS requirement. The output of about 90 billion gallons of E10 is about 70% of all gasoline sold in the United States in 2008.

There is currently no commercial, large-scale production of bioethanol or biodiesel for transportation purposes in Russia.  One of the main obstacles is production cost.  Factors that influence production cost include the choice of input and technology, the location of production facilities, and climatic factors.  A second important obstacle is an existing excise tax on ethanol makes production of a bioethanol additive for domestic transportation purposes cost prohibitive.  Third, Russian energy companies, which own the oil refineries and gas stations, see biofuel as a prospective additive to gasoline sometime in the future, but they are not eager to invest now in biofuel R&D projects.  Oil companies cite a number of impediments to the development of the biofuel business, such as biofuel production costs, the amount of arable land required, and the Russian climate. 

On the demand side, private individuals and businesses may see the benefits to the environment (in terms of GHG emissions on a full fuel cycle basis), but they are unlikely to push for more expensive biofuel blended fuel. 

Domestic Concerns and Challenges

In addition to the many commercial and business issues that have not yet been addressed, there are policy and legislative reasons why the biofuel sector has not developed. 

First, it will be challenging to develop a subsidy policy that would encourage both the use of non-food grade grain and bio-waste for biofuel production (thus benefiting farmers and chemists) and the use of a biofuel additive by oil refineries and fuel blenders (thus creating positive incentives for these businesses).  Over time, large-scale projects will have to become less dependent on subsidies and justified on the basis of economic efficiency and technological advances.  R&D funding is particularly needed to develop more cost-effective technologies for producing advanced biofuels.  Such technologies and equipment, however, can be acquired abroad and applied domestically.  The Russian federal government classifies “technologies for production of fuel and power from organic raw material” as “critical.”  The government considers these technologies “important from the socio-economic standpoint or for the defense of the country and state security,” but funding to develop them is still lacking.  The use of government subsidies is also being debated.  As the state begins to bail out faltering private businesses, critics are complaining that the last thing Russia needs is another heavily subsidized sector—one where the government, rather than business, chooses where investment should go, and favors certain recipients with financial incentives. 

Second, it will be necessary to remove the currently prohibitive excise tax on bioethanol used as a gasoline additive. 

Third, the traditional inertia against producing something new will have to be overcome.  Regulation and production standards for fuel bioethanol and biodiesel will have to be put in place.  Russian consumers continue to complain about poor quality gasoline, and even the best quality bio additive will perform poorly if mixed with low quality fuel.

The Russian leadership has begun to task the Ministry of Energy and regional authorities with creating conditions for the greater use of renewable energy in electricity generation by Russian utility companies.

Overview of the Executive Directive

On January 8, 2009, Prime Minister Vladimir Putin signed an executive directive which calls for an increase in the energy efficiency of the Russian electric power sector on the basis of renewable energy sources.  The directive sets several specific targets for expanding the share of renewable energy in electricity generation from less than the current 1 percent to 1.5 percent in 2010, 2.5 percent in 2015, and 4.5 percent by 2020.

Hydropower plants with a capacity of more than 25 megawatts (MW) are not included in these figures, but the targets do include small hydro power plants, as well as tidal, geothermal, wind, solar, and biomass sources, according to a RusHydro presentation in the fall of 2008.  For example, Russia’s wind-power capacity (estimated at 12 MW in 2005) is projected to increase tenfold to 120 MW in 2010, 1,500 MW in 2015, and 7,000 MW (or 7GW) by 2020.  (For comparison, Canada’s installed wind energy capacity reached about 2.3 GW in 2008, supplying about 1 percent of the country’s electricity demand.  United States wind energy capacity grew by 50 percent in 2008 to 25.1 GW.)

To meet the targets set in the directive, the Russian Ministry of Energy is tasked with taking a large number of measures, including deciding on pricing for electricity produced from renewables; attracting private investment for new and existing projects; engaging domestic industrial sectors and services; improving statistical reporting on the use of renewables in electricity generation; and raising public awareness about renewable energy sources.

The federal policy on the use of renewables in electricity generation through 2020 is, however, more than declarative.  On the basis of the directive, the Ministry of Energy is to engage federal agencies and utilities and seek their input and cooperation in order to fulfill the tasks outlined in the directive.  The directive should also spur regional governments “to make provisions in their development programs” for measures that foster the implementation of the new government policy.

Implications of the Directive

RusHydro, a Russian state-controlled company and the world’s second largest producer of hydro-based electricity after Canada’s Hydro-Quebec, already produces approximately 15 percent of the country’s electricity.  The company has ambitious investment plans for new large and small hydro power projects and a vision for the development of the domestic wind power sector.  However, the company’s 2009 investment commitment (417 million rubles or about $13 million at the dollar exchange rate of 32 rubles) for small hydro, wind, and tidal power projects is conditional on the allocation of federal budget subsidies.  RusHydro relies on legislative and executive support for the expanded use of renewable energy sources.  If Putin’s directive is followed up with more executive orders (as RusHydro expects it will be in 2009), then this will in all likelihood influence domestic utilities and manufacturers.

There could also be greater use of renewables in future years if foreign and domestic investors in Russian utilities see cost-effective opportunities for generating additional income from renewables and remain committed to expanding the use of clean energy sources.  Likewise, Russian industrial manufacturers will produce and supply equipment if there is growing demand for their services.  Foreign suppliers of equipment and engineering services may come to see this as an area where partnerships and even joint ventures would be welcome.

Over the long-term, renewable energy initiatives can potentially create “green” jobs for blue collar workers and professionals.  However, before this happens, legal and regulatory issues would have to be addressed.

Challenges to Implementation

The presidential directive cites numerous hurdles to the growth of electricity generation based on renewable energy sources, but also outlines comprehensive measures to address these concerns.  If federal and regional authorities choose to cooperate with interested parties, domestic and/or foreign, more investment in small hydro, wind and solar power projects is likely to follow.  These projects will be limited by geographical factors, of course, and, to some extent, by competition for the attention of Russian authorities preoccupied with the present difficult financial and economic situation.  Success stories of foreign companies engaged in renewable energy business can encourage more Russians to think “green,” not only in terms of how these projects impact the environment, but also in terms of potential profit-making opportunities.

Russia’s top leadership  is on record supporting the development of solar power projects in the country. At a March 2008 meeting with Vladimir Putin and Dmitry Medvedev, Chairman of the State Duma Boris Gryzlov stressed the importance of solar power for electricity generation and mentioned a patented Russian technology for solar power applications that could be marketed.  Gryzlov’s August 2008 article in the  Russian Journal “Expert” noted  that “Development of renewable energy will  make it possible not only to address the problem of energy supply, reduce dependence  on  hydrocarbon raw materials and improve the ecological situation, but also to make money from the production and export of high-tech products and engineering solutions.” 

In October 2008, Prime Minister Vladimir  Putin supported a proposal  made by  the state corporation Rosatom to invest in polysillicon production  and  to construct  a solar equipment plant in Krasnoyarsk Region to produce solar modules.   This project would involve Rosatom’s Zheleznogorsk polysilicon plant, the state-owned Krasnoyarsk Machine-Building Plant (Krasmash), and OJSC Krasnoyarsk Non-Ferrous Metals Plant (KrasTsvetMet).   Other state corporations, Rosnanotekh and Vheshekonombank, might participate in co-financing the project, whose goal is to create a vertically integrated manufacturing value chain  from the supply of  raw materials  to the assembly of solar modules.

In September 2008, Rosnanotekh signed a strategic cooperation agreement with Oerlikon, a Swiss industrial technology corporation partly   owned by  the  Renova Group of Companies,  a  leading asset management company  in Russia. In May 2008, Renova Industries Ltd increased its stake in Oerlikon to 39.1 percent.  Oerlikon’s subsidiary, Oerlikon Solar, is a  major producer of equipment for manufacturing solar cells.

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