Environment, energy efficiency and renewables

Environment

Over the past years, Russia has adopted complex environmental legislation that is generally in line with commonly accepted international standards. Its practical implementation, however, remains limited due to the general character of regulations and the inconsistent application of the corresponding penalties. This forces the legislator to develop the respective regulations further with clearer commitments and a more transparent system of liabilities and sanctions.

One may also see further developments in such areas as waste treatment and climate change regulation.

Notwithstanding efforts applied by the state, investment in environmentally efficient technology in Russia remains low in comparison to developments in the rest of the world. This is due to regulatory constraints as well as to a lack of public awareness and understanding of environmental issues.

Legislation on environmental protection

The main federal law setting out the fundamental principles of environmental regulation in Russia is Federal Law No. 7-FZ dated 10 January 2002 “On Environmental Protection” (the “Environmental Protection Law”). The Environmental Protection Law provides for an overall framework for environmental management and imposes general requirements related to the construction and operation of various facilities that may be harmful to the environment.

Types of environmentally dangerous facilities

The Environmental Protection Law classifies facilities depending on the level of their environmental impact and indicates which methods of state control are applicable to each category of facility, as follows:

The criteria to classify facilities are currently established by the Russian Government 1 Government Decree No. 2398 dated 31 December 2020. .

Air protection

Main requirements

The main federal laws regulating air protection are the Environmental Protection Law and Federal Law No. 96-FZ dated 4 May 1999 “On Air Protection”.

One of the main principles of the state policy on air protection is mandatory state regulation of emission of polluting substances into atmospheric air.

The following activities are expressly prohibited:

• emitting pollutants into the air without a permit (when such permit is required by law);
• exceeding the established maximum concentrations of pollutants in emissions; and
• emitting prohibited pollutants into the air.

Owners of facilities of Categories I and II must prepare a project of maximum allowable emission values and regularly report to the supervising authorities. As for owners of facilities of Category III, they only have reporting obligations.

Setting emission quotas

On 1 January 2020, the Russian Government launched an experiment on setting emission quotas 2 Federal Law No. 195-FZ “On Carrying out an Experiment on Setting Quotas of Emission of Polluting Substances and Amending Certain Legislative Acts of the Russian Federation Relating to Reduction of Atmospheric Air Pollution” dated 26 July 2019. . The experiment will be carried out in 12 industrial cities of Russia until 31 December 2024. The ultimate goal of the experiment is to reduce atmospheric air pollution.

At the first stage, the authorities will:

• adopt a complex plan of measures for the reduction of emissions in each city; and
• prepare summary calculations to identify the main pollutants and facilities emitting such pollutants (mainly, facilities of Categories I and II).

Thereafter, the quotas will be set for the above facilities, and entities or individuals operating them will bear obligations to limit emissions to meet the set quotas and regularly report to the supervising authorities. For these entities or individuals, such obligations will exist in addition to the obligations relating to the preparation of a project of maximum allowable emission values and observance of the established maximum concentrations of pollutants in emissions as outlined in the section above.

It was initially planned that most of the above actions would be implemented in 2020. However, due to a lack of financing, only some of the selected cities completed the first stage, and the experiment has been postponed for one year. In parallel, extending the list of the participants in the experiment to 48 cities is being discussed.

Water protection

The main federal laws regulating water protection are the Environmental Protection Law and the Russian Water Code.

Similar to air protection, it is expressly prohibited to:

• discharge pollutants into bodies of water without a permit (when such permit is required by law);
• exceed the established maximum concentrations of pollutants in discharges; and
• discharge prohibited pollutants into bodies of water.

Owners of facilities of Categories I and II must prepare a project of maximum allowable discharge values and regularly report to the supervising authorities. As for owners of facilities of Category III, they only have reporting obligations.

Land protection

The main federal laws regulating land protection and preventing its contamination are the Environmental Protection Law, the Russian Land Code and Federal Law No. 101-FZ dated 16 July 1998 “On State Regulation Ensuring Fertility of Agricultural Lands”.

Unlike with air and water protection, landowners are not subject to a requirement to hold any permits or submit reports with respect to the use of land.

However, they must prevent any contamination, depletion, degradation, damaging or destruction of their land.

Land quality monitoring must be also continuously conducted to ensure compliance with applicable sanitary standards.

Environmental payments

Pollution discharge fees

Pollution discharge fees are calculated for each waste ingredient and pollution type depending on the level (volume or weight) of the danger they pose to the environment and public health.

The following activities are subject to pollution discharge fees:

• the emission of polluting substances into atmospheric air by stationary sources;
• the discharge of polluting substances into bodies of water; and
• the storage and burial of production and consumption waste.

The corresponding pollution discharge fee structure is calculated depending on the following elements:

• pollution within the permissible norms and established limits;
• application of an increasing coefficient for certain regions and environmental facilities based on ecological factor;
• application of an increasing coefficient for the above-limit discharge (x25 for waste, and x25 or x100 for other polluting substances depending on the facility’s category); and
• application of an incentive system (reducing coefficients down to x0 or increasing coefficients up to x100 depending on the application of environmentally friendly technologies and so-called “best available technologies” (“BATs”) (see the relevant section below); implementation of measures and plans aimed at reduction of pollution, etc.).

Environmental fee

On 22 April 2016, a Government Decree setting the rates of the environmental fee relating to the management of production and consumption waste came into force 3 Russian Government Decree No. 284 dated 9 April 2016. . Such environmental fee must be paid by goods manufacturers and importers who fully or partially fail to perform their waste management obligation by not meeting the established compulsory recycling targets 4 The compulsory recycling targets are set for 2021 by Russian Government Ordinance No. 3722-r dated 31 December 2020. These targets vary from 10% (for clothes and textiles) to 45% (for corrugated paper and cardboard). . The list of goods, in respect of which this environmental fee is payable, is quite broad and contains 54 types of goods including textiles, paper products, petroleum products, plastic products, batteries, computers, communications and electrical equipment. The environmental fee rates are set in Russian roubles for each ton of the product and/or packaging to be recycled and range, for example, from RUB 2,025 (EUR 22 5 At the notional exchange rate of RUB 90 = EUR 1, as used for convenience throughout this guide. ) for accumulators to RUB 33,476 (EUR 372) for rechargeable batteries.

Currently, the new concept of Extended Producer Responsibility is also being developed in Russia.

The main principles of the concept adopted by a working group at the Russian Government in December 2020 are as follows:

• Manufacturers and importers remain responsible for managing the waste generated from their goods or paying the environmental fee for failure to do so.
• For packaging, the compulsory recycling target will increase to 100% by 1 January 2022 (it is not clear yet whether it will be a one-time or gradual increase).
• Environmental fee rates will likely increase to cover the full cost of the collection and recycling of waste, including packaging.
• Respective state registers of manufacturers and importers, goods and packaging and recyclers will be created to monitor compliance with the new rules.

The proposed measures can potentially improve the situation with recycling of waste, particularly packaging. On the other hand, it will inevitably increase the financial burden for goods manufacturers and importers.

Vehicles recycling fee

Manufacturers and importers of vehicles must pay a recycling fee.

The Russian Government 6 Russian Government Decree No. 1291 dated 26 December 2013 and Russian Government Decree No. 81 dated 6 February 2016. sets the types and categories of vehicles subject to the recycling fee and ratio of this fee.

This ratio varies depending on the engine volume, capacity, weight and age of a vehicle.

The recycling fee is calculated by multiplying the established base rate by the applicable ratio set for a vehicle type.

As of 1 January 2021, the base rate for light vehicles is RUB 20,000 (EUR 222), for self-propelled vehicles (tractors, cranes, forklifts, etc.) – RUB 172,500 (EUR 1,917) and for other vehicles – RUB 150,000 (EUR 1,667).

The Russian Government sets and regularly reviews the above base rates.

Water tax

According to the Russian Tax Code, water tax is payable by entities and individuals who use bodies of water for the following licensed activities:

• water extraction;
• hydropower production;
• use of water area; and
• wood rafting.

The water tax rates and tax bases vary depending on type of body of water (rivers, lakes or seas) and type of activities.

Taxpayers must file tax returns and pay water tax on a quarterly basis.

Environmental liability

Violation of environmental law can lead to civil, administrative or criminal liability.

Civil liability

The Environmental Protection Law sets the principle of the full reimbursement for the damage caused to the environment.

There are two methods for such reimbursement:

• recovery of damages by paying compensation; or
• restoring the disturbed state of the environment.

The court hearing the case will choose which method of reimbursement applies.

In the first case, the amount of compensation is determined based on the actual costs of restoring the disturbed state of the environment (considering also the losses incurred, including loss of profit), or based on the established rates and methods of calculation.

In the second case, a restoration works project must be prepared to define the offender’s obligation to restore the environment.

An extended limitation period of 20 years applies to claims for damages caused to the environment (instead of the standard three-year term).

Administrative liability

Administrative liability in the field of environmental protection comes for offences set forth in Chapter 8 of Russian Code on Administrative Offences.

Within the framework of administrative liability, the offender can be warned or fined, the products and technical means of committing an environmental offence seized, or the offender may be deprived of a licence to use natural resources or conduct business activities related to environmental management.

For many offences, instead of a fine, an administrative suspension of activities for up to 90 days is possible.

The amount of fines for the same offence is different for individuals, company officials, legal entities and individual entrepreneurs.

Administrative liability is often combined with civil liability (see above).

Criminal liability

Criminal liability for environmental crimes is provided by Chapter 26 of the Russian Criminal Code.

Unlike administrative offences, crimes usually result in severe damage to the environment, harm to health or death.

Depending on gravity of its consequences, an environmental crime may lead to a fine, deprivation of the right to hold certain positions or carry out specific activities, mandatory works, correctional tasks, limitation of freedom, arrest or imprisonment.

Under the Russian Criminal Code, only individuals may be subject to criminal liability. Legal entities cannot.

It is not possible to hold an individual liable both administratively and criminally for the same violation at the same time.

“Waste reform”

On 1 January 2019, the so-called “waste reform” 7 Federal Law No. 503-FZ “On Amending the Federal Law on Production and Consumption Wastes and Certain Legislative Acts of the Russian Federation” dated 31 December 2017. was launched in Russia.

Its main goals are to organise the process of household waste treatment, including its disposal, and to implement the separate collection of such waste.

To this end, each region 8 Save for Moscow and Saint Petersburg, for which the launch of the “waste reform” has been postponed to 1 January 2022. has to implement the following measures:

• prepare and approve a regional waste treatment scheme;
• select a regional operator responsible for the waste treatment process in the relevant region;
• set regional waste treatment tariffs payable by all entities and individuals generating waste;
• build waste sorting and processing facilities; and
• implement a separate waste collection system 9 The dedicated road map was adopted by the Deputy Prime Minister of the Russian Government on 1 June 2020. .

Most regions of Russia have approved waste treatment schemes, selected regional operators and set relevant tariffs. In the period from 2019 to 2020, more than 40 regions launched separate (i.e. two-container) waste collection.

However, in many cases, regional operators are suffering from insufficient and irregular financing and lack of available facilities. The adopted regional waste treatment schemes are not always well developed and usually require additional revisions.

There is room for improvement in this sphere, which, notwithstanding the above, remains attractive for potential investors. This is particularly true for the creation of the required infrastructure (e.g. waste sorting and processing plants; waste collection and transporting vehicles and equipment) and the implementation of separate waste collection systems in the regions.

In 2019, the state established the Russian Environmental Operator (the “REO”) as a special public company to coordinate the activities of regional operators and to ensure the implementation of waste treatment measures.

An important part of the REO’s activities is financing investment projects in this area and attracting private investors. Such financing can take various forms (e.g. participation in investor charter capital, issuance, acquisition and disposal of bonds, or participation in concession agreements, public-private or municipal-private partnership agreements).

Sanitary protection zones

The regulation of sanitary protection zones (“SPZs”) in Russia has always been deficient. For a long time, the relevant provisions on SPZs have been provided by the sanitary and epidemiological rules (“SanPiNs”), but these did not contain comprehensive regulation.

According to Federal Law No. 342-FZ 10 Federal Law No. 342-FZ “On Amendments to the Russian Town Planning Code and Certain Legislative Acts of the Russian Federation” dated 3 August 2018. , all estimated or preliminary SPZs established earlier will cease to exist by 2022, and all SPZs will be established in accordance with the new rules.

From 1 January 2022, SPZs and the related restrictions will be deemed to be created from the date of their registration in the Unified State Register of Immovable Property.

Government Decree No. 222 dated 3 March 2018 further provides that SPZs must be established in relation to facilities which have a chemical, physical or biological impact on humans and the environment (“Hazardous Facilities”).

It is expressly prohibited to use the land plots located within the boundaries of an SPZ for the following purposes:

• building residential real estate, educational and medical units, children’s recreation organisations, open-air sports facilities, recreation and gardening zones;
• setting up food, pharmaceutical or drinking water production facilities, if the quality of the relevant products may be affected by neighbouring Hazardous Facilities;
• building or refurbishing capital structures if their permitted use does not comply with the restrictions established within an SPZ.

Any person affected by an SPZ is entitled to arrange for necessary measurements to be effected and submit an application for reducing the SPZ without the consent of the owner(s) of the relevant land plots or Hazardous Facilities. Previously, any changes to an SPZ initiated by third parties were subject to such consent. This change is supposed to intensify the land development process.

BATs

The concept of BATs was introduced by Federal Law No. 219-FZ dated 21 July 2014 but only entered into force to the full extent on 1 January 2020. To date, several relevant Government Decrees and Ordinances have already been adopted on the applicable list of industries 11 Russian Government Ordinance No. 2674-r dated 24 December 2014. , BAT qualification and BAT handbooks 12 Russian Government Decree No. 1458 dated 23 December 2014. , etc.

The criteria for a technological process, technological method or equipment to be considered as a BAT generally include the following:

• minimal level of negative environmental impact;
• cost efficiency of implementation and operation;
• use of resource-efficient and energy efficient methods;
• implementation period; and
• industrial introduction at two or more enterprises impacting the environment in Russia.

A list of industry-specific BATs is provided in 51 specialised handbooks, which have been developed by a BAT Bureau created in January 2015 and adopted by Rosstandart.

In terms of incentives, fixed assets that are qualified as main technological equipment and operated with the use of BAT are subject to accelerated depreciation for corporate income tax purposes.

Starting from 1 January 2020, manufacturers who implement BATs do not have to make environmental payments for emissions and discharges (if within the permissible norms). Moreover, companies shifting to BATs are eligible for financial support through a special fund granting loans for modernisation purposes.

Climate change

Even though Russia participates in the United Nations Framework Convention on Climate Change adopted in 1992 and acceded to the 1997 Kyoto Protocol thereto, the implementation of the main principles of climate change mitigation in Russia has been rather fragmentary. The relevant activities accelerated upon adoption of the Paris Agreement on climate change mitigation in 2019.

In early 2020, the Russian Government released a draft long-term climate strategy to 2050 (the “Strategy”). The Strategy sets out four different scenarios in relation to dynamics of greenhouse gas emissions.

Under the basic scenario provided by the Strategy, the goal is to ensure a reduction in greenhouse gas emissions by up to 2/3 compared to the 1990 level by 2030. This target corresponds to a volume (70%) set in Presidential Executive Order No. 666 dated 4 November 2020. This means that the target set for 2030 will be roughly at the current level of greenhouse gas emissions.

The Russian Government has recently started to develop a draft bill on limiting greenhouse gas emissions. It is envisaged that this bill will introduce state monitoring for the reduction of greenhouse gas emissions resulting from business activities. The bill will determine state incentives and other support measures to encourage voluntary implementation of the respective climate projects.

Following the world-wide trend on decarbonisation of the economy formed under the Paris Agreement on climate change mitigation, the Russian Government also adopted, in October 2020, the road map on development of hydrogen energy in Russia to 2024. If this document is implemented as intended, important decisions could be adopted as early as the first half of 2021, such as drafting the concept of hydrogen-energy development in Russia. We may expect that this new energy sector will emerge in the coming years.

Energy efficiency

Russia offers unique opportunities for investors who want to implement projects in the energy efficiency (“EE”) sphere and, more particularly, for representatives of countries that already possess experience of implementing EE and energy saving (“ES”) technologies.

The main piece of legislation for EE matters is Federal Law No. 261-FZ “On Energy Saving and Energy Efficiency Increase and Amending Certain Legislative Acts of the Russian Federation” dated 23 November 2009 (the “EE Law”). It created a legislative, economic and organisational stimulus for ES and increasing EE.

To facilitate the efficient use of energy resources and to support and encourage ES, the EE Law provides for several groups of EE requirements applicable to various sectors, notably including the construction (EE requirements as to buildings, structures and installations) and the public sectors.

EE requirements for buildings, structures and installations

According to Russian EE rules, buildings, structures and installations (with only a few exceptions relating to cultural heritage sites, religious buildings, individual houses, etc.) must comply with the obligatory requirements. The Russian Ministry of Construction, Housing and Utilities is responsible for setting these requirements 13 Order of the Russian Ministry of Housing and Building No. 1550/pr dated 17 November 2017.  in accordance with the special rules adopted by the Russian Government 14 Russian Government Decree No. 2035 dated 7 December 2020. . The EE requirements are to be revised at least once every five years and should cover:

• the energy consumption rates and maximum energy consumption limits for buildings/structures;
• requirements relating to the architectural, functional, technological, construction, engineering and technical solutions influencing the EE of buildings/structures; and
• requirements relating to specific construction elements of buildings/structures, applicable equipment, technologies and materials.

These EE requirements on design, construction, reconstruction and major repairs identify the parties (developers/builders/owners) responsible for implementation. Failure to comply with them may result in administrative liability 15 A “per breach” penalty for company officials at the rate of RUB 20,000 - 30,000 (EUR 222 - 333); for individual entrepreneurs – RUB 40,000 - 50,000 (EUR 444 - 556); for legal entities – RUB 500,000 - 600,000 (EUR 5,556 - 6,667). .

EE labelling of goods and buildings

The EE Law provides that certain types of goods must contain information about their energy efficiency class on their labels and supporting technical documentation. Such goods include passenger lifts and domestic appliances, such as refrigerators, TV sets, washing machines, air conditioners 16 For the full list, please see Russian Government Decree No. 1222 dated 31 December 2009. .

Newly constructed apartment buildings must also have energy efficiency marks on their facades showing the EE class assigned to them by the competent authorities.

EE requirements for public sector

One of the main priorities of the EE Law is the public sector. For instance, energy consumption reduction targets are set for publicly financed institutions. Moreover, companies with state participation and companies carrying out regulated types of activities are also obliged to adopt and implement programmes aimed at increasing EE.

All purchases by state or municipal clients must be made in accordance with ES and EE requirements fixed by the Russian Ministry of Economic Development with the agreement of the Russian Ministry of Energy, the Russian Ministry of Industry and Trade, and the Russian Federal Anti-monopoly Service. These requirements which concern the public procurement of certain types of goods, works and services whose performance requires considerable amounts of energy consumption, include, in particular:

• limits on energy consumption; and
• technological solutions influencing the EE of goods/works/services ordered.

The federal authorities referred to above must monitor and analyse the EE of publicly procured goods, works and services on an annual basis, and they must prepare annual proposals for reviewing the EE requirements for public procurement.

Energy service agreements

Energy service agreements are entered into between a customer (private or public sector) and a contractor to provide works and services aimed at ES and greater EE.

These agreements must include the following mandatory conditions: (i) the volume of ES guaranteed by the contractor; (ii) the expiration date (which may not be less than the term necessary to achieve the ES set by the agreement); and (iii) other mandatory conditions required under Russian legislation.

The discretionary terms of an energy service agreement may include, among other things (i) a clause setting the price for the works and services, subject to the results attained or expected to be attained upon the performance of the contract (e.g. the value of ESs); and (ii) a clause stipulating the obligation of the contractor to install and commission energy meters.

Clauses containing the essential elements of an energy service agreement may be included in contracts of sale and purchase, supply and transport of energy resources (except natural gas not used as motor fuel). Model terms of these contracts have been approved by the Russian Ministry of Economic Development.

Energy audit mechanisms

Previously, the EE Law provided for two main types of energy audit: voluntary and obligatory. According to Federal Law No. 221-FZ 17 Federal Law No. 221-FZ “On Amendments to the Federal Law “On Energy Saving and Energy Efficiency Increase and Amending Certain Legislative Acts of the Russian Federation” and article 9.16 of the Administrative Offences Code of the Russian Federation” dated 19 July 2018. , there now is only one type of energy audit, namely voluntary.

Energy audits may only be conducted by companies and individual entrepreneurs who are members of self-regulated organisations. The audit should be aimed at:

• collecting objective data on the volume of energy used;
• defining EE indicators;
• defining the ES potential and increasing EE; and
• developing and evaluating a list of possible programmes which target EE increase.

The results of the energy audits must be reflected in an energy passport comprising information on the presence of energy meters, the volume of energy used and the variations of such volumes, etc. Copies of energy passports are forwarded to the Russian Ministry of Energy which is responsible for processing, systematising and analysing the information contained in these passports.

Instead of obligatory energy audits as provided earlier by the EE Law, state and local authorities as well as state-owned and municipal institutions now have to submit annual declarations of electric power consumption.

Incentives

In order to encourage private investors to participate in the EE programme, the EE Law proposes a range of financial/tax incentives.

Such incentives for commercial companies include, in particular:

• investment tax credits of up to 100% for companies investing in EE and ES technology;
• accelerated depreciation of assets categorised as having high EE or assets classified in the top EE class (“Qualifying Assets”);
• three-year corporate property tax exemption on newly accounted for Qualifying Assets; and
• partial compensation of interest on loans granted by Russian banks for the purpose of investing in ES and increased EE technology.

Renewables

State policy

Since the adoption in 2009 of the Russian Energy Strategy to 2030, the Russian legal and regulatory framework has improved but still remains somewhat inconsistent, with the renewable energy sources (“RES”) generation target being revised several times.

A Government Ordinance 18 Russian Government Ordinance No. 1-r dated 8 January 2009.  in 2009 set a target of 4.5% by 2020, excluding large hydropower plants of more than 25MW. A Government Ordinance 19 Russian Government Ordinance No. 1472-r dated 28 July 2015. in July 2015 shifted this target to 2024.

The above target corresponds to approximately 5.9GW of newly installed RES capacity (excluding large hydropower plants) by 2024 and is to be achieved using three renewable technologies: solar, small hydro and wind, with the latter covering the major share of approximately 3.4GW.

In 2020, a new Russian Energy Strategy for the period up to 2035 was adopted 20 Russian Government Ordinance No. 1523-r dated 9 June 2020. . This Strategy recognises the development of RES as one of the priorities of the Russian energy sector. Despite adoption of the new Strategy, the above target has not been revised.

As of 1 January 2021, hydro, solar and wind power account for 21.47% of the country’s total installed power capacity of about 245.31GW.

The Russian legal and regulatory framework sets the rules on wholesale and retail energy trading, and offers certain incentives.

Subsidy scheme and tariffs

A so-called “premium scheme” applied to the wholesale prices for RES generated electricity, was introduced in 2007 by an amendment to Federal Law No. 35-FZ “On Electricity” dated 26 March 2003 (the “Federal Electricity Law”). However, largely due to the consumer price concerns and legal difficulties with developing a clear implementation mechanism, this price scheme, which would have been equivalent to a feed-in tariff, has never been put in practice.

In 2011, another support mechanism was introduced by the Federal Electricity Law: the promotion of RES through the capacity market. This scheme aims to ensure the financial viability of investments into renewables by concluding “Capacity Supply Agreements” with RES project developers.

The legal framework for this scheme was further developed in 2013 under Government Decree No. 449 21 Russian Government Decree No. 449 dated 28 May 2013.   (“Decree 449”). Decree 449 establishes the regulatory mechanisms for selecting new RES projects and for their capacity supply agreements. Under a capacity supply agreement, the supplier undertakes to construct RES generation facilities in the relevant region. Once constructed, the project enjoys a long-term beneficial capacity price, which aims to guarantee returns on investments (with a 12% profit margin) over 15 years. The capacity to be produced by such facilities is selected by way of annual tenders for renewables at a price that is usually several times higher than the price for existing conventional capacity.

More specifically, the bidders must provide a technical description of the project, including the percentage of localisation (local content) and project financing/guarantee structures. On that basis, the trading system administrator will select the winning bids, and a relevant RES capacity supply agreement will be signed. After completion of the construction, the authorities check that the generating facility meets certain requirements, such as those relating to the localisation of the equipment installed on the generating facility.

Various other financial, legal and tax incentives are available at the local, regional and federal levels, depending on the specifics of a particular RES investment project (e.g. region of investment and degree of localisation, type of capital expenditure, legal and project financing structure such as a special investment contract (SPIC) – please see the Import substitution and production localisation in Russia chapter for more details).

However, although this is a significant step towards the creation of a regulatory framework designed to promote clean energy production in Russia, there are still restrictions. Firstly, this scheme is only applicable to RES generation facilities eligible for the wholesale market (5MW capacity or more). Secondly, it does not allow the promotion of renewable energy technologies in the regions of Russia that have fully regulated tariff systems and the more isolated regions, where the deployment of renewables is economically feasible and supported by the availability of renewable resources. Thirdly, and above all, only projects in which a certain percentage of Russian technology and locally-produced components have been used (the so-called “local content requirement”) may qualify for the purposes of favourable pricing regime. For example, for 2020 to 2024, for wind projects, the required degree of localisation is equal to 65% and, for solar projects, it is 70% 22 Russian Government Ordinance No. 1-r dated 8 January 2009. . A Government Decree 23  Russian Government Decree No. 426 dated 3 June 2008. and an Order 24 Order No. 3788 of the Russian Ministry of Industry and Trade dated 24 September 2018.  of the Russian Ministry of Industry and Trade provide the local content requirements for each type of RES, and also provide the formula to calculate a relevant degree of localisation. This is a key condition to ensure project bankability and thus sustainability, as a reduction factor is applied to capacity price for projects without the required degree of localisation (0.35 for solar power and 0.45 for wind, small hydro and waste treatment power sources) 25 Decree 449. .

Starting from 2025, an additional requirement will be applicable to newly commissioned RES generation facilities: the target value of exported products, which will gradually increase for wind and solar power from 5% to 15% 26 Russian Government Ordinance No. 2749-r dated 24 October 2020. .

Energy-from-waste facilities

Apart from the wind and solar focus, in 2017-2018 Russia introduced a set of legislative amendments aiming to extend the existing renewable energy scheme to energy-from-waste facilities 27 Russian Government Decree No. 240 dated 28 February 2017, Russian Government Decree No. 398 dated 31 March 2018. . Currently only the Republic of Tatarstan (55MW) and the Moscow Region (approximately 280MW) are included in the list of Russian regions where such facilities are to be built. In 2018, two new Russian regions were added to the list: the Krasnodar Krai (55MW) and the Stavropol Krai (55MW). However, no bids were submitted for these new projects, and the 2018 tender for the construction of waste-burning plants was not successful. In 2019, no tender was announced at all. We expect developments in this sector will largely depend on the successful implementation of the recent “waste reform” in Russia (please see the relevant section above).

Micro-scale generation

In 2019, new legislation was adopted to support micro-scale generation in Russia . It provides that the owners of micro-scale generation facilities may sell any excess electric power produced to retail consumers (in this case, suppliers of last resort), and the latter may not refuse to purchase such electric power. In addition, from 1 January 2021 to 1 January 2029, any proceeds from the sale of electric power generated by micro-scale generation facilities will be exempt from personal income tax.

Recent developments

Based on amendments to the Rules of the Wholesale Electricity and Capacity Market 28 Russian Government Decree No. 432 dated 11 April 2017. , the Russian regulatory body, the Market Council, launched an annual tender for the construction of facilities generating electricity from RES in 2020 as follows: 180.09MW of wind and 41.932MW of small hydro projects. In fact, during this 2020 tender, the remaining capacities available for tendering were allocated. The winners got 15-year capacity supply agreements under Decree 449.

The market is now awaiting new regulations (and new capacities to be tendered) regarding the period beyond 2024. It has been already announced that the renewable energy sector will continue to receive state support after the expiry of the current incentives until 2035.

Preliminary estimates are that funds allocated to supporting investment projects in renewable energy in this period may reach approximately RUB 400bn (EUR 4.4bn), and new capacity is expected to reach up to 10GW. However, the exact volumes of such support are not finally defined yet.

In parallel with these funding measures, the Market Council has initiated and is currently working on the development of the concept of Russian green certificates, which may be used to supplement the existing incentive structure. Thus, for the first time in Russia, the concept of green certificates seems to be a potentially workable option. By selling these green certificates, consumers could reduce their total amount of payments for capacity under the current support mechanism of capacity supply agreements. As for power suppliers, the green certificates could act as a source of return on their investments.

Outlook

Russia has the potential to increase the use of all types of renewable energy technologies. Historically (since the Soviet period), it has a well-developed hydropower segment. Its bioenergy potential is also significant, as this technology is used in the agriculture, forestry, infrastructure and trade sectors. But today, the Russian renewable energy policy is focusing on accelerating the deployment of wind and solar photovoltaic.

More generally, there are a number of drivers in Russia that explain the increasing focus on renewables and decentralised energy. New energy solutions are seen as a way to modernise the power system and meet the recently declared goals of decarbonisation of the economy. However, they are also a part of a broader socio-economic development model to achieve higher living standards. In addition, a decentralised electricity generation system is of interest to Russia’s remote and distant regions, as it is economically impractical to extend high-voltage electricity lines to these regions.

Furthermore, decentralised electricity generation is also interesting and attractive for industrial complexes. It offers opportunities for them and allows them to become more independent from the centralised power system. The current situation of relatively high electricity prices is another reason to explore new energy solutions.

RES should also play their role in the emerging sector of hydrogen energy.

Finally, in response to the EU and US sanctions (please see the Introduction), Russia’s local content requirements have become one of its main economic policy drivers supporting inbound investments and technology transfers to develop local innovative technologies, including in the RES sector.