Russian Renewable Incentive Scheme Finally Delivers with 2.2 GW Auction

For the fifth year in a row, Russia’s energy market regulator played its part in implementing the country’s flagship renewable incentive scheme – by holding a capacity auction for renewable generation projects. For years, though, Moscow’s efforts to boost green energy production have fallen far short of the government’s very modest goal of increasing renewable power to 4.5 percent of energy use by 2024. In previous capacity auctions, local content requirements are thought to have dampened interest in and hindered the success of the incentive scheme.[1] Despite the fact that those requirements are still in place (and have actually become even more stringent), projects with more than 2 GW of installed capacity were selected at the 2017 auction held in June. According to press reports, the reason for the uptick in participation is a number of planned partnerships between international developers/ manufacturers and (largely state-run) domestic companies. Through the lens of the most recent bidding results, this article provides background information on the capacity auction, its mechanics and the incentives it offers project participants as well as discusses what all that means for potential future bidders.

The current regulatory framework dates back to Governmental Decree No. 449 from May 28, 2013.[2] Pursuant to Decree No. 449, the annual auction takes place over two stages. In the first stage, all bids that meet the defined requirements (regarding installed capacity, project start date and capital costs per kW) make it to the next round. In that second stage, projects are selected one by one (according to lowest planned capital expenditures) until all the capacity on offer is taken. This year’s auction covered projects with start dates from 2018 to 2022 and had a total of around 2.8 GW of capacity up for grabs, segmented by source type and year.[3] In this year’s auction, the first round took place from May 29th to June 2nd, and the second stage spanned June 5th to 9th.

The projects selected in the second round get the right to enter into capacity supply agreements that lock in monthly payments and guarantee a minimum return on investment. Per Annex No. 2 to Decree No. 449, the capacity price formula includes a 12 percent return on capital. Further sweetening the pot, selected renewable project developers are allowed to enter into agreements for 15 years, rather than the otherwise maximum of 10 years. Capacity prices under the contracts take into account revenues required to cover both operating and capital costs, as well as the amount of electricity expected to actually be sold on the market. However, there are minimum electricity supply requirements that, if not met, result in a reduction of the capacity price received in the following year. As set forth in Annex No. 1 to Decree No. 449, solar projects need to deliver at least 14 percent of installed capacity, wind projects – 27 percent and hydro – 38 percent.

Until 2017, there had been insufficient interest to scoop up all of the capacity offered in each of the auctions. In 2013, a total of 505 MW cleared the process, out of approximately 2,100 MW available. In 2014 around 575 MW out of more than 2,500 MW of capacity were claimed. In 2015, 365 MW were selected out of nearly 2,000 MW. And in 2016, 610 MW made the cut despite almost 2,300 MW having been up for bid. In 2013–2016, solar project developers showed the most interest, accounting for nearly 1,200 MW of the approximately 2,000 MW worth of projects selected in four auctions conducted during the period.

It’s thought that one of the largest obstacles to broader participation in the green energy incentive scheme had been the set of stringent local content requirements imposed on any selected project. For the 2017 auction, wind projects had to have either 55 or 65 percent (depending on the planned start year) of project components sourced from within Russia, while hydro projects demand 65 percent and solar installations require 70 percent. If a winning bid fails to meet the localization thresholds once built, the capacity price paid will be reduced by 55–65 percent. The government has hoped that such sourcing demands would stimulate greater domestic investment and job creation.

Until recently, the local content requirements were especially problematic for any would-be wind project developers. In the 2013–2015 auctions a miserly 191 MW of capacity were selected out of more than 3 GWs on offer combined over those years. However, with the emergence of a subsidiary of the state-owned nuclear power company, Rosatom, wind has been the most popular resource over the last two contests. VetroOGK got the go-ahead for 610 MW of wind-generated capacity in the 2016 auction and an additional 360 MW this year. The company has said that it is retooling existing factories to churn out domestically produced wind turbines, which will enable it to comply with the content requirements. Reportedly, Rosatom has sought to work with several leading international turbine makers in the process.

In this year’s wind auction, projects with a total of 1.65 GW of wind capacity were selected. And for the first time in the auction’s history, there were more bids for wind projects than there was capacity on offer. The biggest winner in 2017 turned out to be Fortum Energiya, which is an affiliate of the Finnish energy major, Fortum Oyj, and which successfully bid for 1 GW of wind capacity. Reportedly, Fortum will link up with Russia’s state-owned investment vehicle, Rusnano, to develop domestically sourced components.

Thus, despite the demanding sourcing requirements, the initial signs from the 2017 auction are that renewable project developers are finding a way to work within the existing incentive framework (in addition to the 1,650 MW of wind projects, 520 MW of solar and 50 MW of hydro were selected). That being said, for those looking to get in on future auctions or projects, there are at least two reasons for caution going forward. First, the success of this year’s auction appear largely dependent on projects that will have some involvement of government-controlled entities. While partnerships with such companies may help smooth some administrative processes, foreign investors may also have to factor in additional risks that come from pairing up with state players in a country not renowned for a perfectly independent judiciary. Second, the vast majority of selected projects from the past two auctions look to rely on untested production and supply chains/ventures. VetroOGK (the Rosatom subsidiary that now has nearly 1 GW of projects in the pipeline) has yet to bring a project online and has yet to prove it can successfully turn its nuclear know-how into wind turbine success. While Fortum Energiya  has already developed one wind project under the auspices of the 2015 capacity auction, it did so when the localization demands were less stringent.

[1] Anna Hirtenstein and Stephen Bierman, Russia Starts Largest Renewable Energy Auction in Bid for Jobs Bloomberg (May 29, 2017, 12:00 AM),

[2] Postanovlenie Pravitel’stva RF o Mekhanizm Stimulirovaniya Ispol’zovaniya Voznovlyaemykh Istochnikov Energii na Optovom Rynke Eletricheskoy Energii I Moshchnosti [Governmental Decree on the Mechanism for Stimulating the Use of Renewable Energy Sources in the Wholesale Electricity and Power Market], Sobranie Zakonodatel’stva Rossiiskoi Federatsii [SZ RF] [Russian Federation Collection of Legislation] 2013, No. 23, Item 2909 (as amended).

[3] Administrator Torgovoy Sistemy Optogo Rynka Elektroenergii [Administrator of the Trading System of the Wholesale Market],  Informatsiya, Neobkhodimaya dlya Provedeniya Konkursnykh Otborov Investitsionnykh Proektov po Stroitel’stvu Generiruyushchikh Ob’ektov, Funktsioniruyushchikh na Osnove Ispol’zovaniya Voznovlyaemykh Istochnikov Energii na 2018, 2019, 2020, 2021, i 2022 Gody [Information Necessary for the Competitive Selection of Investment Projects Relating to the Construction of Renewable Energy Generating Facilities for 2018-2022], available at

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