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NATIONAL RESEARCH UNIVERSITY

HIGHER SCHOOL OF ECONOMICS

HSE Saint-Petersburg School of Social Sciences and Area Studies

Thesis

The politics of renewable energy policy: why do (not) the Russian regions implement the mechanism of renewable energy support

In the field of study 41.03.04 `Political Science'

Reviewer Academic supervisor PhD in Political Science A.A. Dekaltchouk

Student of Group No. 161 (`Political Science and World Politics' degree programme) Ruslan Valiev

Saint Petersburg 2020

Annotation

В рамках данного исследования мы выяснили, какие политические факторы повлияли на решение регионов Российской Федерации в пользу (не) реализации механизма поддержки возобновляемых источников энергии (ВИЭ) на основе договоров поставки мощностей (ДПМ) с 2013 по 2018 год. С помощью логистической и Пуассоновской регрессий, было выявлено, что это приближающиеся выборы в регионе, уровень связи региона с федеральным центром, а также тот факт, что регион имеет богатые запасы углеводородных полезных ископаемых.

This paper focuses on the capacity based renewable energy support scheme (CRESS) analysis in Russian regions. The purpose is to reveal the reasons why in some regions the CRESS was implemented, while in the others it was not. Statistical methods of analysis will be used to figure out the political factors that could affect its implementation from 2013 to 2018 in each region. Among them there could be distinguished: upcoming elections, the fossil resources endowment, the openness of the political regime, and the level of regions' connection with the federal center. As a result, we have upcoming elections, the fossil resources endowment, and the level of regions' connection with the federal center factors to influence the regions' decision (not) to implement the CRESS.

Content

The federal system of the Russian Federation has changed dramatically since the beginning of the 2000s. Bary, Dona. 2004. "Novyy Federalizm I Paradoksy Regional'nogo Suvereniteta V Rossii". In Federalizm: Rossiyskoye I Mezhdunarodnoye Izmereniya (Opyt Sravnitel'nogo Analiza). Kazan'.; Gel'man, Vladimir, and Sergei Ryzhenkov. 2011. "Local Regimes, Sub-National Governance And The `Power Vertical' In Contemporary Russia". Europe-Asia Studies 63 (3): 451; Gel'man, Vladimir. 2006. "Leviathan's Come-Back? (Policy Of Recentralization In Contemporary Russia)", no. 2: 90-109. The change was connected with the end of the Yeltsin era, to wit, with the end of constitutional and purely informal federal system and the beginning of the highly politicized `negotiated' federal system of the Putin's era. Ross, Cameron. 2010. "Federalism And Inter-Governmental Relations In Russia". Journal Of Communist Studies And Transition Politics 26 (2): 170. In the 1990s the collapse of the Soviet regime and the setting of market reforms triggered the logical decentralization and democratization processes at the regional level. Gel'man, Vladimir, and Sergei Ryzhenkov. 2011. Op. Cit. 450.: Zubarevich, Natalya. 2010. "State-Business Relations In Russia'S Regions", 211-226. The logical decrease in the central capacities of Russia to distribute and coerce power in both political and economic dimensions with regard to sub-federal units caused, as Gel'man alleges, a great diversity in terms of regional politics. Ibid. We can simply call it as the partial devolution of power from the federal government to the regional governments with the orientation of the latter to maintain the “status quo, which was based upon redistributive social policies”. Ibid.

It thus created a new regional system where regions could directly influence the central government, and set their own policies and legislation which were not in favor and did not correspond to those of the federal center. Bary concludes that the federal government, in order to stop the decentralization, was forced to start signing bilateral agreements with the regional governments to share competences granting subnational units some privileges. Bary, Dona. 2004. Op. Cit. The number of regional-based normative acts reached 300,000, but everything was condemned to become upside down due to an upcoming political event.

1.1.2 Putin's era: 2000s-2010

After the new President Putin came to power in 2000, he launched a new political agenda to “reassert the powers of the Kremlin over the regions”. Ross, Cameron. 2010. Op. Cit. It set the new nature of the federal system in Russia which Gel'man and Sharafutdinova call the `power vertical'. Gel'man, Vladimir, and Sergei Ryzhenkov. 2011. Op. Cit.; Sharafutdinova, Gulnaz, and Rostislav Turovsky. 2016. "The Politics Of Federal Transfers In Putin'S Russia: Regional Competition, Lobbying, And Federal Priorities". Post-Soviet Affairs 33 (2): 161-175. This term denotes “a hierarchical model of regional governance” and, furthermore, it costs Russia tremendous political changes. The mechanism of `power vertical', as it has already been said, works through several formal and informal rules of the game.

First, it leads to almost full deactivation of electoral contestation in regional and national politics. Golosov, Grigori. 2008. "Elektoral'Nyi Avtoritarizm V Rossii". Pro Et Contra 12 (1): 22-35. Gel'man and Sharafutdinova claim that, for Russia, such an electoral abolishment meant (and means) “the de-facto prohibition of open political competition of regional elites” with the following integration of them into a new party of power, the United Russia (Edinaya Rossiya) party. Gel'man, Vladimir, and Sergei Ryzhenkov. 2011. Op. Cit.: Golosov, Grigori. 2008. "Elektoral'Nyi Avtoritarizm V Rossii". Pro Et Contra 12 (1): 22-35. Second, the `power vertical' reduces the political independence of regional governors. In the Russian case, when the process of recentralization took place, the Kremlin hierarchically subordinated regional chief executives and city mayors since 2004 by the approval of the upper chamber of the Russian parliament to allow the President to suggest them to be appointed (however, in 2012 the governors' elections were restored). Busygina, Irina. Op. Cit. 105-119.: Ross, Cameron. 2005. "Federalism And Electoral Authoritarianism Under Putin". Demokratizatsiya: The Journal Of Post-Soviet Democratization 13 (3): 347-372. Last, but not least, the vertical model of governance used by a federal center usually requires subnational units to have (1) permanent favorable electoral results and (2) to have a well-functioned anti-protests structures in order not to be dismissed by the center. Gel'man, Vladimir, and Sergei Ryzhenkov. 2011. Op. Cit.; Sharafutdinova, Gulnaz, and Rostislav Turovsky. 2016. Op. Cit. Busygina, along with Gel'man and Ryzhenkov, also highlights that the federal center demands (3) social patronage as the permanent pillar of sub-federal political stability as well. Busygina, Irina. 2016. Op Cit. 113.; Gel'man, Vladimir, and Sergei Ryzhenkov. 2011. Op. Cit.

To sum up intermediate results, the new turn from the much-decentralized Russian federal system with a weak federal center and chaotic regional political structures to the new strict form of centralization with the strong federal center and supervised regions can be described in a twofold manner. On the one hand, some researches proclaim that the new form of vertical governance brings to the regions of Russia an old-fashioned style of “unitary federation” where everything is handled by the center. Ibid. Nevertheless, on the other hand, Busygina argues that the time actually proved the Russian `power vertical' not to working “like the strict hierarchy of a unitary state; it was much more reminiscent of an imperial order”. Busygina, Irina. 2016. Op Cit. 113. It means that instead of a total control, the new system creates a kind of principal-agent order between the two layers: the federal executive (the principal) and the regions (agents).

For instance, Moscow can ask regions to fulfill these demands on an ongoing basis, but then it is mostly indifferent to what it is going on in the regions. The center now has the instrument and intention to punish and reward, but not to instantly control the regions. Ibid. If we can clearly see what stands behind the punishment for the regional elites (to be dismissed by the center), the reward instrument is more vague. Paradoxically, Busygina and Gel'man with Ryzhenkov believe that after the federal demands are fulfilled by the Russian sub-federal units, “Moscow in fact connives with regional executives giving them freedom which represented their reward”. Ibid.; Gel'man, Vladimir, and Sergei Ryzhenkov. 2011. Op. Cit. What is more, the regional power can increase the degree of its freedom by an asymmetrical exchange of an information with the federal center, misinforming it. Ibid. Notwithstanding, such a free space does not bring any incentives for the governors and the regional elites to be creative and, for instance, to make their regions investment- and labor-attractive to compete with each other. Ibid. It is simply because the federal center does not expect it from them and the informal agreement is mainly about “loyalty and electoral results”. Busygina, Irina. 2016. Op Cit. 113. Eventually, it is just too risky to be creative, but it is still possible and that is the most significant conclusion.

Having said so, we can understand that the `power vertical' model of the federal governance in Russia creates not a despotic system as such, but the strict, stable, and center-oriented dual system where the interests of both the upper and lower layers of government can more or less be satisfied by a mutual informal agreement. However, the very essence of the agreement is to limit and to control the regional authorities not by systematic command, but by the described `carrot and stick' policy. The carrot in its turn allows the sub-federal units in Russia to have some freedom which is limited by the center. Nevertheless, there is no doubt that some creative activities (policies) - if they are not about elections, social policies, or strikes - are more than possible in the regions if their political elites are brave enough to take a risk.

At this point, it is crucial to connect the reviewed federal system of the Russian Federation with the renewable energy sphere in the next sub-section before we can move to the key part of the chapter itself - the CRESS.

1.2 Renewable energy in Russia's federal system

First and foremost, main goal of renewable energy is to provide consumers with electricity, logically meaning that RE is a part of the electricity sphere. In Russia, the electricity sector is a prominent example of `power vertical' centralization of power at the federal level. Boute, Anatole. 2013. Op. Cit. 13. The Russian electricity sector is so giant that the Russian government has to control it via a unified (all-Russia) approach (it is called the Unified Energy System (UES) of the RF). Federal'nyy Zakon "Ob Elektroenergetike" Ot 26.03.2003 N 35-FZ. 2003. Art. 4-6. The same logic is traced in the legal regulation of the UES where “the Federal Electricity Law `pre-empts', on the basis of the study made by Boute, regulation in the electricity sector”, Boute, Anatole. 2013. Op. Cit. 12-13.; Federal'nyy Zakon "Ob Elektroenergetike" Ot 26.03.2003 N 35-FZ. 2003. Art. 4. i.e., regional authorities in Russia are not able to freely act in the electricity sector unless they are allowed to do so by the federal center. The afore-mentioned Article 72 of the Constitution also explicitly establishes the federal regulation of renewable energy sources, including the promotion of RE in the Russian regions. "Chapter 3. The Federal Structure. Art 65-79. | The Constitution Of The Russian Federation". 2020. Constitution.Ru. http://www.constitution.ru/en/10003000-04.htm. Hereafter, there is no space for the regional level to act.

The regulation of RE in Russia, to wit, the determination of strategies and measures (and support schemes as well), is put on the shoulders of the federal government as we have already understood. However, to manage such big processes is the task of the special regulator (for the wholesale market) called the Market Council which is responsible for qualification of all RE facilities in the country. Boute, Anatole. 2013. Op. Cit. 12-13. Regions are ironically excluded from these processes too despite the fact that the qualification task (Boute calls it “the cornerstone of the RE system in Russia) directly affects whether a facility in a particular region will be supported by a governmental maintenance (the CRESS) or not.

Nonetheless, even within the federal-biased regulation of renewable and, correspondingly, electricity spheres in Russia, there are some unique regional competences which create the most important means of overcoming the `power vertical' formal obstacles for the Russian regions - the normative ones. With regard to the wholesale market, regions are rewarded by the Government Decrees (GD) numbers 823 and 1225 about the Russian Energy Efficiency Strategy with the legal responsibility to deploy renewables as an energy improvement measure within regional energy efficiency programs including the CRESS.Governmental Decree N823 "O SKHEMAKH I PROGRAMMAKH PERSPEKTIVNOGO RAZVITIYA ELEKTROENERGETIKI". 2009.; Governmental Decree N1225 “O trebovaniyakh k regional'nym i munitsipal'nym programmam v oblasti energosberezheniya i povysheniya energeticheskoy effektivnosti”. 2009. Basically, these GDs confer regional authority with the obligation to participate and to influence federal and regional strategies towards economic benefits from RE sources. Ibid. What does it imply in detail for an understating of what competences regions have with regard to the renewable energy based support scheme?

Specifically for the CRESS, with the reference to the Russian Ministry of Energy, regions are given a right: (1) to issue a land tenure permit for businesses to launch renewable energy based power plants and (2) to define terms and conditions of the inclusion of renewable energy generating facilities in a region's electric development plan. Ibid. We cannot but mention that our research takes as a risk that regional authorities of the Russian federation, on the basis of the above-mentioned competences, are able to influence the CRESS promotion in their regions. The risk is based upon the vagueness of the competences' formulation which are either too broad to use them effectively or which are broad enough to influence the CRESS.

With regard to the retail market, one of the main competences to adapt renewable energy sources of electricity (RES-E) tariffs is granted to the regional authorities. Such tariffs play a central role in regional RE policies, “since they are responsible to determine the price at which network companies purchase RES-E”. Boute, Anatole. 2013. Op. Cit. 15. The GD of the Russian Federation number 97 about the Regulation of the Regional Tariff Authorities allows regional authorities to determine the procedure of the formation of tariffs and their regulation. Governmental Decree N97 “O federal'nykh standartakh oplaty zhilogo pomeshcheniya i kommunal'nykh uslug na 2016 - 2018 gody”. 2016. Another important competence which is given to regions as a reward is to organize a contest among RE companies for a governmental maintenance. Ibid.

Overall, we can see that the formal situation in the sphere of renewable energy sources in Russia is ambiguous. On the one hand, the centralized and hierarchical system of relations between the federal and regional layers appreciably enslaves the lower level in terms of freedom of a legislative and even a procedural act. It shows the absence of the autonomous competences which regions could have had. Nonetheless, there are several shared and exclusive federal competences opening some space for regions to maneuver. So, there are still procedural and regulatory frameworks like tariffs of RES-E or RE promotion responsibility creating the legal and logical basis for regions to participate and influence the sphere of RE in Russia.

Notwithstanding, it is important to shed some light on the informal side of the sphere which is, by the rule, also the part of `power vertical' system. There is almost no literature on the topic of informal agreements between the federal and regional levels in electricity sphere. But we can logically conclude that the renewable energy policies do not belong to the spheres where regional authorities have to show their loyalty and order. These are social policies, elections, and strikes. However, we cannot say so about consequences that these policies can entail like an increase in electricity price. That is why, we can suggest that the Kremlin is more or less indifferent to renewable energy sphere in regions unless it affects electorates' comfort zones by increases in electricity prices. Smeets, Niels. 2017. Op. Cit. 101: 140.; Boute, Anatole, and Alexey Zhikharev. 2019. Op. Cit. 1. Only in such case it can become a risky situation for the sub-federal elites. All other means are dependent on the informal agreements, ties of the regional governments with the federal center which can both reward a region with an appropriate support and punish it with a political dismissal, as Gel'man and Busygina see it. Busygina, Irina. 2016. Op Cit. 113.; Gel'man, Vladimir, and Sergei Ryzhenkov. 2011. Op. Cit.

After having reviewed how the federal system in Russia works, what the constitutional division between layers of power is, and whether the regions in Russia have sufficient regulatory power to influence renewables' promotion at all, we can move to the key part of the chapter devoted to the capacity-based renewable energy supportive mechanism in Russia and all its features.

1.3 The policy process: Russia's capacity-based renewable energy support scheme

In spite of the critical opinion about the renewable energy industry in Russia as about a weak and small industry in the resource-endowed country, renewables in Russia have a long political and legal history. This history resulted in a development of Russia's renewable energy support scheme by the Government in order to “diversify Russia's energy mix, catch up with Western renewable technologies, reduce transportation and fuel costs and reduce GHG emissions”. Smeets, Niels. 2017. Op. Cit. 101: 140. It needs to be said that initially there had been a premium scheme of renewables support which was later replaced by the capacity-based support scheme, lately called the CRESS. Ibid.; Boute, Anatole. 2013. Op. Cit. 15.

The CRESS implies that “a maximum installed capacity of solar, wind and small hydro projects could obtain financial guarantees on Russia's wholesale electricity market” annually. Smeets, Niels. 2017. Op. Cit. 101: 140. In contrast to its predecessor, the premium scheme introduced in 2008, the CRESS, in other words, remunerates the availability of RE plants to generate electricity, but not their key performance production of energy. This newer scheme was introduced in 2011 by the amendment of the 2003 Federal Electricity Law and the adoption of the GD on the CRESS in 2013. The Government of the Russian Federation thus aims to define the essence of the new mechanism, its orders of action and goals: to build “5.426GW of renewable energy facilities, including 3.276GW from wind, 1.759GW from solar power and 0.389GW from hydro by 2024”. Ibid. Needless to admit that the premium scheme - despite its earlier engineering - never saw the horizons of an implementation because of the high political disputes around the renewable sphere in Russia per se. Boute, Anatole, and Alexey Zhikharev. 2019. Op. Cit. 4. Smeets says in his research that there are no determined reasons why the premium scheme was not implemented, but he thinks that the key reason was in gas and oil industries opposition. Smeets, Niels. 2017. Op. Cit. 101: 140.However, we cannot say so about its successor which was already practically launched in 2013.

The Government set a special body called the Administrator of the Trading System (ATS) to manage and supervise the CRESS actual implementation. Thus, it states that the order of action of the CRESS implies the organization of annual tenders in which “companies are invited to place bids for RES projects to be commissioned in the subsequent four years”. Smeets, Niels. 2017. Op. Cit. 101: 140.: “Thus, in 2013 a tender had been organised for projects to be realised by the end of 2014 through 2017”. Boute also adds that winners of the tender which have the lowest capital expenditure (CAPEX) are rewarded with the governmental guarantee to sell their capacity (on a mandatory basis) over 15 years with a pinned price. Boute, Anatole. 2013. Op. Cit.; Smeets, Niels. 2017. Op. Cit. 101: 140.: “a pinned price - a preferential price which ensures a 14% return on investment”. The 2013 GD also requires RE producers to meet a threshold of a local content requirement (LCR) in each plant for each renewable energy type. Governmental Decree N449 “O mekhanizme stimulirovaniya ispol'zovaniya vozobnovlyayemykh istochnikov energii na optovom rynke elektricheskoy energii i moshchnosti”. 2013. It means that investors have to use, to a certain extent, an equipment for a construction which is produced in Russia. It should (originally) improve the local outdated systems and rise the domestic producers' value. It is interesting that those who are not able to reach LCR will be punished by financial penalties.

By now, it can be seen that the RE sphere is comparatively new for Russia and is only in the developmental stage. We can see the same with regard to the CRESS which is the byproduct of political contestation and economic necessity. Some authors proclaim in their research that both the sphere and its main instrument can be already barely named successful due to two stumbling blocks. The first one is that, the Russian government had overestimated its quantitative forecast to reach 4.5% of RE share up until 2020 and consequently decreased the goal to 2.5% until 2024. It creates an embryo of further uncertainty of new investors in terms of stability and investment attractiveness because it shows a close link between the RE sphere and politics. Smeets, Niels. 2017. Op. Cit. 101: 141. The second one is connected with LCR which becomes an obstacle which is hard to overcome because the Russian industry of RE equipment is not developed. Boute, Anatole, and Alexey Zhikharev. 2019. Op. Cit. 4.

To connect the unexpected turn in the Russian energy strategy in 2008 and the intermediate results of the CRESS as a policy explaining the circumstances in which it was engineered we have to use policy cycle stages for a description: (1) agenda-setting; 2) policy formulation; 3) decision making; 4) policy implementation; 5) evaluation. Ibid. We will start with the first stage - we will look at the moment when support schemes for renewables were on the goal setting phase of the policy process.

1.3.1 The agenda setting stage

In 2009, the afore-mentioned first quantitative renewable energy incorporation goal was set by the Russian government, stating that 4.5% of the total electricity generation has to be provided by RE. Smeets, Niels. 2017. Op. Cit. 101: 141. Such an unconventional turn in the state's energy strategy was due to several reasons. First, the global financial crisis and the oil prices' enormous decrease made Russia reconsider its energy strategy in response to gas and oil-oriented energy security in the country. Merlevede and the coauthors say that Russia needed to diversify its energy supply by introducing a new energy mix - a renewable one. Merlevede, Bruno, Koen Schoors, and Bas Van Aarle. 2009. "Russia From Bust To Boom And Back: Oil Price, Dutch Disease And Stabilisation Fund". Comparative Economic Studies 51 (2): 213-241. What is more, in this same year the Ministry of Energy of Russia highlighted a necessity to “save fossil fuels for next generations and to improve the reliability of power supply to local businesses”. Smeets, Niels. 2017. Op. Cit. 101: 142. Yet, the old-fashioned catch up with the Western technological process was also named as one of the reasons to launch such a goal. Ibid.: “this [support scheme] program has been launched solely to support domestic competence and, in particular, to keep up with the scientific-technical revolution in the energy sector, especially renewables” - First Deputy Minister of Energy and chairman of the Russia's oil company Bashneft Aleksey Teksler”. The fact that many politicians and high-ranked businessmen admit the importance of the renewable supply introduction (even from the oil spheres - the direct opposition supposedly) indicates that the decision was made first and foremost politically - Smeets concludes. Ibid.

All the political and economic factors, despite the constraining institutional factors (a possible mild fossil fuels industry opposition) which had been luckily bypassed by the newborn policy allowed it to move to a second stage - a policy design phase.

1.3.2 The policy formulation stage

Logically, it is insufficient to just set a goal without introducing any instruments for its achievement. To reach the desired energy mix with renewable energy therein, the Government decided that a market support scheme for the green energy was necessary. Smeets, Niels. 2017. Op. Cit. 101: 143. However, despite the fact that the new sphere is highly politicized, the institutional opposition represented by fossil fuels electricity producers still exists. These producers do not allow the electricity prices to increase dramatically in order not to destabilize Russian citizens' comfort zone which is necessary for the federal center. Ibid. In other words, it is sort of a political tradeoff between the federal authorities and fossil energy producers. An introduction of a new way of electricity production implies a possible increase in the energy prices, which leads to a dissatisfaction of the peaceful and loyal electorate. Ibid. The task of a new scheme's introduction was burdened with the task of making it insensitive to prices, which entails a creation of a subsidizing scheme. Ibid. The CRESS was thus designed to allow the state to “keep control over quantity and price of RES projects thereby minimizing the risk of electricity price hikes”. Vasileva, Evgeniia, Satu Viljainen, Pekka Sulamaa, and Dmitry Kuleshov. 2015. "RES Support In Russia: Impact On Capacity And Electricity Market Prices". Renewable Energy 76: 82-90.