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Energy industry February 12, 2014

Germany offers blueprint for energy use

aerial view of solar panels field in Offingen, Germany
The Russian prime minister’s strategy could benefit from looking to Germany’s “Energiewende” - an energy policy used as an economic stimulus - as a framework for jumpstarting Russia’s stagnant economy.

As Russia seeks new ways of stimulating economic growth, the Economic Development Ministry under Alexei Ulyukayev in late January issued a plan to foster competition in the non-natural resource sectors, support investment by Russian companies, and promote the development of human capital. Meanwhile, Prime Minister Dmitry Medvedev promised more than 21 billion rubles ($597 million) to help small and medium enterprises, plus tax breaks, and a Federal Guarantee Fund that facilitates credit financing for businesses.

Medvedev’s stimulus package focuses on businesses in manufacturing, services, and research. However, economic development could also be promoted by initiatives that establish a decentralized energy supply.

The Russian prime minister’s strategy could benefit from looking to Germany’s “Energiewende” - an energy policy used as an economic stimulus - as a framework for jumpstarting Russia’s stagnant economy. The central European nation’s approach includes phasing out nuclear energy, decarbonizing the energy supply, and promoting decentralized, renewable energy. These decentralized energy provisions contributed €10.7bn to the German economy in 2011, according to estimates from the Institute for Ecological Economy Research. The installation, operation, and maintenance of these energy facilities have been seen to be important drivers of local employment.

In Germany, these communal energy services are organized as co-operatives. Between 2001 and 2012, their number increased from 66 to 656, spread throughout the country. The German Renewable Energies Agency estimates that these energy co-operatives have invested around €1.2bn in so-called “citizens’ power plants,” including solar power, wind, and biomass.

By all accounts, Russia’s power supply structure needs a fundamental overhaul. Until 2030, the total capital investment required in generation capacity and grid infrastructure could well exceed €500bn, according to official estimates in “Russia’s energy strategy to 2030,” which was approved by the government of the Russian Federation in 2009. Initiatives like promoting energy co-operatives could also help stabilize Russia’s ailing transmission and distribution network, because they are the first step to creating largely autonomous island systems that need less energy from outside their boundaries.

A second feature of the rapidly changing German energy market may be particularly interesting to fostering economic growth in Russia’s rural areas: more than 130 bioenergy villages were active, or in the process of setting up their local energy supply system, by mid-2013. These communities produce power and heat by burning organic material like agricultural waste and often combine it with electricity generated from solar and wind. Local businesses and employees of the co-operative take charge of operating the plant and managing its finances. The use of biomass also provides secure and stable returns for farmers in the community.

Almost forty million Russian citizens currently live in rural areas, so these are ideas that Russia could realistically adopt and promote. With wind power along the coast, in the steppes and mountainous regions, solar energy in the south, and biomass in the vast agricultural areas of the country, Russia has the potential to produce a third of its total energy consumption from renewable resources, according to the International Energy Agency in its 2001 report “Renewables in Russia – from opportunity to reality.” After substantial cost reductions in all renewable energy technologies in recent years, the economic potential is likely to be much higher nowadays than when the International Energy Agency published its assessment more than a decade ago.

Indeed, the Russian government has set ambitious goals for renewable energies. Decree 449 “Renewable Energy Source Development Measures” released in May 2013, requests that by 2020 the share of renewables, excluding hydropower in the energy mix, will have increased from 0.8 to 2.5 percent. In comparison, Germany raised electricity production based on renewable energy from 3 to 25 percent within the last two decades, with almost half of all installations owned by private residents and farmers. Until 2050, renewable energy resources are estimated to provide 60 percent of all German energy consumption – including 80 percent of its electricity supply.

This might have serious implications for Russia’s energy exports. Today, Germany’s energy supply depends heavily on Russian natural gas imports. The German government considers natural gas the ideal complement to intermittent renewable energy resources like solar power or wind. But the average annual operating time of German natural gas plants has declined – dropping from 3,400 hours in 2010 down to 2,640 hours in 2012. The underlying reason for that development is that gas-fired plants are being crowded out of the electricity wholesale market by lignite and hard coal plants, which have lower operating costs. Representatives of energy utilities are complaining that new gas-fired plants aren’t worth the investment.

Companies like E.ON, which is also active in Russia with its subsidiary E.ON Russia — privatized in 2007 under the name OGK-4 — have even threatened to mothball some of their assets. Still, if Germany introduces so-called capacity markets, which serve as a backup supply if renewable generation is unable to satisfy demand, investments in gas-fired plants are likely to go ahead.

On the retail side, there isn’t yet an immediate threat to Russian natural gas sales. According to the German Association of Energy and Water Industries, almost half of Germany’s 38.2 million homes are heated with natural gas. But many projects to extend the gas distribution grid in rural areas have been abandoned. Instead, solar panels and heat pumps fuelled by a combination of electricity and thermal energy from the ground and the air are on the rise. In 2012, heat pumps accounted for around a quarter of new heating installations, totaling more than 70,000.

The German government’s support of solar panels has led to substantial cost reductions. According to representatives of the EU’s Joint Research Council, the overall cost of producing a kilowatt-hour with solar panels has decreased to 12 euro cents. With average residential electricity prices of around 30 euro cents per kilowatt hour, solar power is likely to further erode the market share of gas boilers in years to come.

Despite these challenges for its gas exports, Russia could immediately benefit from Germany’s renewable energy transition by cherry-picking and copying elements that may revitalize the stagnant Russian economy. The path towards more decentralized supply would not only enhance local employment and provide a stimulus to the economy, but it would also create new business opportunities for established energy utilities and other enterprises across Russia. Like in Germany, Russian utilities could start offering services such as management and operation of local, autonomous energy systems to communities.

Russia has the opportunity to follow in Germany’s footsteps and start planning a supply system for tomorrow.

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