On March 7, 2018, Russia's Administrator of Trading System for the Wholesale Electricity Market (“ATS”) officially released the notice on the tender of renewable energy IPP projects for 2019-2023. The notice shows that 105 renewable energy IPP projects (with total installed capacity exceeding 2,935MW) will be put into commercial operation in Russia's wholesale electricity market in the next four years. ATS will also select investors of renewable energy IPP projects with total installed capacity exceeding 1,250MW for 2019-2023. The details are as below:
On March 7, 2018, Russia's Administrator of Trading System for the Wholesale Electricity Market (“ATS”) officially released the notice on the tender of renewable energy IPP projects for 2019-2023. The notice shows that 105 renewable energy IPP projects (with total installed capacity exceeding 2,935MW) will be put into commercial operation in Russia's wholesale electricity market in the next four years. ATS will also select investors of renewable energy IPP projects with total installed capacity exceeding 1,250MW for 2019-2023. The details are as below:
According to the notice, this tender applied ATS’s Selection Rules for Renewable Energy Power Station Investment Projects (the tender notice and the selection rules in WORD format are available via the direct download links at the end of this article). The tender was conducted in two stages. During the first stage from May 29 to June 4, 2018, bidders should submit the required bidding documents. After a comprehensive evaluation of the expected commercial operation date, quotation per KW, localization rate and other indicators, the shortlisted bidders may clarify their bidding documents and in principle may only reduce their quotations in the second stage from June 5 to 9, 2018.
On the whole, Russia is a country with self-sufficiency in electricity, and nationwide a slight surplus of electricity generation compared with consumption. Even so, in consideration of the factors such as environmental pressure, inter-regional power generation capacity and unbalanced electricity consumption costs, the Russian government has introduced a number of preferential policies for renewable energy IPP projects.
I. Preferential policies
According to the Federal Law “On Electric Power Industry” (the “Electricity Law”), the Russian electricity market is divided into the wholesale electricity market and the retail electricity market by the electricity selling mechanism. The wholesale electricity market is operated by a group of special power trading and technology institutions, such as the Market Council. Power producers playing in the wholesale electricity market should, based on various model forms, enter into the agreement on access to ATS (Договор о присоединении к торговой системе оптового рынка) with the Market Council, ATS, the System Operator of the Unified Energy System (SO UES), Federal Grid Company (“FSK”) and the Center for Financial Settlements (“CFS”). They should also execute the electricity purchase agreements and various supporting agreements in the wholesale electricity market on their own or through aforesaid institutions. Subject to compliance with the mandatory provisions of the applicable laws, power producers in the retail electricity market enjoy greater freedom of negotiation in terms of purchaser selection, purchase agreement terms and tariffs. Whether a power producer is eligible to play in the wholesale or retail electricity market depends mainly on its installed capacity, as shown in the following table:
Overall, the Electricity Law provides three types of preferential policies for renewable energy IPP projects, namely, grid access subsidies, more favorable electricity purchase agreement terms, and preferential procurement of renewable power to make up for grid losses. Except that grid access subsidies are applicable to both the wholesale and retail electricity markets, the other two types of preferential policies are only applicable to the wholesale or retail electricity market, respectively.
1. Grid access subsidies
For eligible renewable energy projects, IPP project companies may, in accordance with the Electricity Law and the Russian government's Regulations on Financial Subsidies for Grid Access of Renewable Energy Power Stations under 25MW (No.850, dated October 20, 2010, the “Regulations on Grid Access Subsidies”), obtain government subsidies for grid access if:
The projects are examined and recognized as renewable energy power generation projects;
- The installed capacity of the projects do not exceed 25MW;
- The projects are put into commercial operation after November 9, 2007; and
- The project companies are not bankrupt, liquidated or under other similar circumstances.
Such subsidies are reviewed and granted by a special committee of the Ministry of Energy of the Russian Federation. According to the subsidy calculation standards, the subsidy amount does not exceed 70% of the grid access fee payable by an IPP project company and does not exceed RUB 15 million (about RMB 1.65 million at the current exchange rate).
It should be noted that the amended Regulations on Grid Access Subsidy, effective on July 29, 2017, provides that IPP project companies will not be entitled to grid access subsidies if their shareholders are companies registered in any countries or regions on the "List of Offshore Territories" released by the Russian Ministry of Finance ("Offshore Companies"), or if their shareholders are Russian companies but 50% or more of their shares are held by Offshore Companies. The List of Offshore Territories includes locations where foreign investors often choose to establish platform companies when investing in Russia, such as the British Virgin Islands, the Cayman Islands, Jersey, Bermuda and the United Arab Emirates. Therefore, if Chinese companies intend to obtain grid access subsidies when investing in Russian renewable energy IPP projects, it is necessary to consciously avoid registering investment platforms in any countries or regions on the List of Offshore Territories when building investment structures.
The grid access subsidy policy is particularly supportive for small renewable energy IPP projects. According to the data available, small hydropower projects with installed capacity of about 5MW and average investment of RUB 700-800 million may receive grid access subsidies of up to RUB 15 million, accounting for about 2% of the investment. It is helpful to improve the overall return on investment to a certain extent.
2. Renewable energy IPP projects eligible for more favorable electricity purchase agreement terms in the wholesale electricity market
Compared with other IPP projects in the wholesale electricity market, renewable energy IPP projects are provided with special model purchase agreement, the terms of which are more favorable to project companies. The main advantages include:
- The tariff is specifically determined for each project. The tariff formula takes into account the investment amount, operating cost, tax burden and reasonable income of the project company, which is beneficial to the project company to generate stable cash flow; and
- The tariff is subject to adjustment on a regular basis according to the tax rate, consumer price index and seasonal electricity index, reducing to a certain extent the risk of the project income being affected by the economic environment.
It can be seen that the electricity purchase agreement of a renewable energy IPP project in the wholesale electricity market takes into account the financing of the project to a certain extent and provides a relatively strong guarantee for investors to recover the investment cost and obtain a reasonable income.
3. In the retail electricity market, when grid operators make up for grid losses, they should preferably purchase electricity from renewable energy IPP projects at the tariffs covering investment and basic income
Due to losses in the power transmission process, grid operators generally need to purchase additional electricity to make up for grid losses. In accordance with the Electricity Law and the Russian government’s Regulations on the Operation of the Retail Electricity Market and the Full or Partial Restriction on Electricity Use dated May 4, 2012, grid operators in the retail electricity market should prioritize purchases from renewable energy power generation companies when making up for grid losses. In this regard, the price authorities of federal entities of Russia determine each year the tariffs at which grid operators purchase renewable power to make up for grid losses according to the calculation method stipulated by the Federal Anti-Monopoly Service of Russia, taking into account such factors as the investment amount of the project, the income level of the Russian government's long-term government bonds, the income level of the investment in renewable energy IPP projects, and the capital recovery period. At present, the capital recovery period is calculated on the basis of 15 years. After the expiration of 15 years, the price authorities of federal entities of Russia will re-approve the tariffs to make up for grid losses without consideration of the investment amount.
These are the preferential policies for renewable energy IPP projects under the framework of the Electricity Law. Other Russian laws and regulations also give other preferential policies to renewable energy IPP projects in terms of tax relief and accounting principles, further enhancing the attractiveness of renewable energy IPP projects to potential investors.
II. Eligibility of renewable energy projects for preferential policies
In order to formally obtain the above preferential policies, renewable energy IPP project companies need to apply to the Market Council for review of their renewable energy IPP projects that have been put into operation.
The requirements and procedures for project review are mainly specified in the Russian government's Regulations on the Evaluation of Renewable Energy Power Stations (No.426, dated June 3, 2008, the “Project Evaluation Regulations”), the Russian government's National Policy Guidance for Improving Energy Efficiency by Using Renewable Energy - 2024 (No.1, dated January 8, 2009, the "Renewable Energy Plan for 2024"), the Administrative Measures for Determining the Localization Rate of Renewable Energy Power Stations released by the Ministry of Economic Development of Russia (No.1556, dated August 11, 2014, the “Administrative Measures for the Localization Rate of Renewable Energy Power Stations”), and other laws and regulations. Projects are specifically reviewed by the Market Council.
Overall, the following main conditions should be met:
- The project has been connected to the grid for power generation;
- The project is equipped with power generation measuring instruments that meet the requirements;
- If generating units rely on fossil fuels for power generation in addition to renewable energy sources, the project should also be equipped with fuel consumption measuring instruments that meet the requirements for each fossil fuel used;
- The localization rate of the project (this standard is only applicable to renewable energy IPP projects in the wholesale electricity market) meets the requirements;
- The project has been included in the vision plan and outline of power system development of the corresponding Russian Federation entity.
Upon receipt of an application from a renewable energy IPP project company, the Market Council will review the project within 45 days. For eligible projects, the Market Council will issue a renewable energy project qualification certificate and include the project in the list of renewable energy projects.
With regard to the localization rate, according to the Project Evaluation Regulations, the overall localization rate of renewable energy IPP projects will be calculated by weighted average of the amount of local purchases in Russia of major equipment and components used and engineering contracting, etc. in the construction of power stations. The Project Evaluation Regulations specify the respective weights of the above-mentioned major equipment and components, engineering contracting and other indexes for the localization rate.
For example, the Project Evaluation Regulations provides that the respective weights of major equipment and components as well as engineering contracting of wind power stations in calculating the localization rate are as follows: fan blades account for 18%; generating units 5-15%; engineering survey and design 7%; and installation 7%.
According to the Renewable Energy Plan for 2024, the required localization rates of renewable energy IPP projects to be put into operation in the next seven years are as follows:
According to the Administrative Measures for the Localization Rate of Renewable Energy Power Stations, the Russian Ministry of Economic Development will be responsible for the assessment of the localization rates of renewable energy power stations. Upon receipt of an application from the renewable energy IPP project company, the Ministry of Economic Development should conduct a localization rate assessment within 30 working days, and will notify the Association of NP Market Council of the approved renewable energy IPP project within 10 working days.
III. Conclusion
This 1,250MW renewable energy target promoted by the Russian government will provide a big market. Overall, in addition to the risk assessment considerations for general overseas infrastructure investment projects, Chinese companies intending to invest in Russian renewable energy projects need to pay attention to the following factors:
- Overseas platform companies: In addition to the considerations of tax planning, financing facilities and investment dispute connection points, the relevant restrictions of the “List of Offshore Territories” should also be considered to build overseas platform companies.
- Choosing appropriate investment areas: Russia's nationwide power system is basically self-sufficient. In some areas, supply even exceeds demand. But there are still some areas with electricity demand or high electricity costs. When assessing the feasibility of a project, companies need to consider the local investment environment and market demand.
- Localization requirements: As mentioned above, some preferential policies for renewable energy IPP projects are subject to compliance with the required local shareholding ratio and localization rate. Failure to understand and prepare in advance may result in ineligibility for preferential policies as expected after completion, thereby affecting the overall income of the project.
Notes
1. Download the Tender Notice of Renewable Energy IPP Projects for 2019-2023 at https://www.atsenergo.ru/sites/default/files/files/informaciya_neobhodimaya_dlya_provedeniya_opv_2018_goda.docx
2. Download the Selection Rules for Renewable Energy Power Station Investment Projects at https://www.npsr.ru/sites/default/files/sr_regulation/reglaments//r27_20022018_20022018.doc
