Generation of the Far East is looking for an investor

According to Kommersant, the cost of upgrading 477 MW of obsolete generation in remote areas of the Far East could be about 80 billion rubles. According to the plans of the Ministry of Energy and RusHydro, investors will recoup their investments through energy service contracts by maintaining fuel savings in the tariff. To improve the economy of projects, the Ministry of Energy proposes to give investors preferential loans and tax preferences. However, many projects in the Far East are unprofitable and cannot pay off through energy services, experts say, suggesting the development of new support mechanisms.

The cost of the local generation modernization program in isolated energy regions of the Far East could be about 80 billion rubles, sources in the industry told Kommersant. This amount is needed to upgrade 270 diesel power plants (DPP) for 477 MW. The modernization program is being developed by the Ministry of Energy together with RusHydro, VEB.RF and the regions on behalf of the President of the Russian Federation. In April, the Ministry of Energy said that the program was being prepared for approval. Now the ministry did not respond to Kommersant’s request.

The need to update generation in remote areas of the Far East and the Arctic has been discussed for several years. In settlements where more than 300 thousand people live, 800 MW of diesel power plants operate with over 60% depreciation. The cost of production at some facilities is more than 300 rubles. for 1 kWh. Final tariffs have to be reduced through subsidies. In some regions, including Yakutia, Kamchatka, Chukotka and Sakhalin, tariffs have been reduced since 2017 due to additional payments to industry in the rest of the country (over 30 billion rubles per year).

The Ministry of Energy proposes to attract investors to modernization through the mechanism of energy service contracts. The investor builds a diesel power plant, renewable energy sources and storage, and after the launch of the facility, returns the investment by maintaining savings in fuel costs in the tariff for 15 years. RusHydro has been using the mechanism since 2020 (see Kommersant dated July 17, 2020): six 12 MW energy service facilities have been launched in Yakutia. Fuel economy per year – 27%.

At the first stage of the program, it is planned to modernize 73 facilities in Yakutia and seven in Kamchatka with a total capacity of more than 150 MW by 2026. RusHydro explained to Kommersant that the holding selected these projects “based on the criterion of ensuring the reliability of energy supply to consumers” and has already concluded energy service contracts with investors. The cost of upgrading facilities, according to Kommersant, is tentatively estimated at 20 billion rubles.

The program of the Ministry of Energy is, in fact, a search for preferential state financing for specific investment projects, says one of Kommersant’s interlocutors. In the spring, the Ministry of Energy said that they were offering to give investors preferential loans and some tax preferences. VEB.RF told Kommersant that the modernization program, which, among other things, will determine the sources of funding, is under development, so the comments are “so far premature.”

RusHydro told Kommersant that the cost of projects has increased over the past two years, including due to rising equipment prices and sanctions restrictions. The main barrier for investors is the high cost of loans (an average rate of 2-3% is required).

The problem lies, among other things, in the imperfection of the energy service mechanism. Small facilities (up to 1 MW) are in most cases unprofitable, it is impossible to sell them through energy services, so it is necessary to look for other support mechanisms, says Vladimir Toshchenko, CEO of Arctic Power Capital (built five facilities in Yakutia with an average yield of about 10% per annum) ). In 2021-2022, the company deliberately skipped most of the tenders for projects in Yakutia, since the yield on them, according to Arctic Power Capital, was only 5-6%. Neither investors nor banks will finance such projects in the current economic conditions, says Mr. Toshchenko.

Systematic measures are needed for the comprehensive modernization of local energy and increasing its efficiency, according to the Corporation for the Development of the Far East (KRDV). The corporation proposes to create a separate Fund for the Development of Distributed Generation (similar to the Housing and Utilities Reform Assistance Fund), says Maxim Gubanov, head of the energy and housing sector of the KRDV. This will allow improving the regulatory framework, long-term planning of investment projects, choosing the best mechanisms for attracting investments, including public-private partnership (PPP) tools.

Vladimir Toshchenko gives an example of a possible mechanism within the framework of PPP: for an object, the maximum level of CAPEX, OPEX and a rate of return of 12–13% per annum are fixed, from which the necessary revenue is calculated for a guaranteed return on investment. At the same time, the final tariff should be tied to the actual fuel economy, he notes.

Polina Smertina