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Monday, October 01, 2007

Russia Beginning To Feel the Heat

Jeroen Ketting © Moscow News09/27/2007 – Moscow News By Rebeccah Billing Sustaining economic growth in Russia cannot be achieved through oil and gas export revenues alone; Russia is currently three to five times less efficient in its energy usage than Western European neighbors, with increasing economic implications. As a land swamped with natural oil and gas resources it is understandable why energy efficiency has not been high on the agenda for Russia. But it seems that the country's complacency in this area could soon come back to bite it. Russia's domestic fuel consumption is steadily increasing in step with the rise in GDP. Thus, in order to meet both its domestic needs and its export obligations, urgent action must be taken in the Russian heat and power sectors. But although the need for change is great, the incentives remain low; competition between companies involved in energy generation, distribution and consumption is weak and the government strictly regulates pricing. One company trying to make headway on the challenging issue of energy efficiency in Russia is Lighthouse Energy Investments (LEI). The Moscow News talks to its director Jeroen Ketting.
MN: What made you set up this Dutch-Russian joint venture? What business potential did you recognize in Russia? Ketting: I looked around at the situation in Russia and I saw that Russia uses three to four times more energy per produced dollar of GDP than other industrialized countries, and industrial production and thus energy consumption is increasing. But 50 percent of industrial equipment installed is old and inefficient and the energy infrastructure (generation and distribution) is deteriorating. Moreover, Russia has a lot of gas and oil reserves but its capacity to produce and to transport oil and gas are limited. With increasing domestic and international demand and with existing export commitments Russia's energy household is stretched to its very limits.  Plus tariffs are increasing. This means that there is an increasing margin and need for energy efficiency in Russia; increasing demand, stagnating supply, rising tariffs and inefficient generation, distribution and consumption. When you combine that with the rising tariffs the financial argument to save energy becomes stronger and stronger.
MN: Russia has copious energy resources and enjoys the status of a major global supplier of fuel and energy, but does it recognize the necessity to devote more attention to enhancing energy efficiency?  Ketting: Energy efficiency is a political issue of minor priority. This means that formally the government recognizes the need for enhancing energy efficiency but in practice very little effective action is undertaken. Also among big business the need for energy efficiency is not sufficiently recognized. In a country where money is easily made selling off national assets on the cheap the understanding that a ruble saved is a ruble earned is still far away.
MN: What do you think about the efficiency of Russia's home utility services (ZhKH), particularly in the heat consumption segment? There is definitely a lot of room for improvement in this area. What concrete steps do you think should be taken to optimize it? Ketting: The efficiency in the heat segment of Russia's ZhKH can be improved considerably. About 80 percent of all gas fired boiler-houses, producing heat, operate at between 60 percent and 80 percent of their capacity. Due to poorly maintained heat transportation and distribution networks, another estimated 30 percent of generated heat is lost during transportation to the end user. But also on the side of consumption there are great inefficiencies. Just consider in how many apartments people still open or close their windows in wintertime to regulate the temperature. In this area there are a number of concrete steps that could be taken: on the side of consumption: individual metering, thermostatic radiator valves, insulation of apartments and control and regulation of heat within apartment blocks.  On the side of Distribution we need to replace all substations, reduce water leakages, insulate distribution piping and introduce variable flow pumping. In terms of generation: boilers need rebuilding along with other measures. Regulations also need to be radically revised so that consumers pay on the basis of actual consumption, tariffs are improved and there is liberalization of the market. There also needs to be a creation of fiscal incentives at the consumer level and of legislative framework favoring energy efficiency and energy saving in the entire energy value chain.
MN: Tell us a few words about the major projects you have executed for ZhKH. Ketting: Lighthouse Energy Investments initiates, funds and manages medium-sized energy efficiency investment projects in Russia. We capitalize on the considerable potential for energy savings and resulting financial gains in Russia. In the area of ZhKH Lighthouse initiates, operates and finances decentralized heat and power generation projects for industrial end users of heat and Municipal District heating companies. Recently, LEI built a privately owned 2.2 Megawatt boiler house in a municipality of the Moscow region. With this boiler house LEI generates heat that it sells to the local district heating company. LEI is also involved in energy efficiency projects and energy performance contracting. The main aim of energy performance contracting is the implementation of the whole spectrum of energy-saving measures on a long-term contractual basis between the client and LEI whereby the latter's profit is an agreed percentage from the total amount of the saved energy resources. Lighthouse also works with large Russian gas distribution companies to reduce natural gas leakage from the gas distribution stations in the gas distribution network.
MN: How economical and mindful of energy-saving policies are Russia's heat generation companies? Have you been approached for advice or assistance by some of them in order to optimize their operations? Ketting: As I explained, the heat generators in Russia do not operate in the most economical way imaginable. Most of the district heating companies (DHC) depend to a large extent on municipal budgets and cannot operate independently financially. Top management of these DHCs are often political appointees with little understanding of the specific business they are in. Interests are short-term or at best limited to the moment of the next elections. But occasionally we are approached by the DHCs for assistance. 
MN: You conducted a major survey for International Finance Corporation to identify investment opportunities in energy efficiency in Russia. What were the main conclusions you arrived at after studying the market? Ketting: Energy efficiency saves money and resources, increases living standards and reduces environmental harm. More importantly, it is relatively cheap, creates immediate results and does not offend any high level business or political interests. The need and potential for energy efficiency has been recognized by as well the EBRD as the IFC. Both IFIs have earmarked considerable resources that can be invested in energy efficiency. The IFC aims to encourage investment by providing financial institutions with roughly $100 millions for loans to companies investing in energy efficiency. The EBRD directly invests in large scale energy efficiency projects.
MN: You have also been active in the Joint Implementation project as part of fulfillment of Russia's obligations under the Kyoto Protocol. Could you brief our readers on the project and your company's role in it? Ketting: The Kyoto Protocol is an agreement under which industrialized countries will reduce their collective emissions of greenhouse gases by 5.2 percent compared to the year 1990. This may not sound like a lot, but remember that, compared to the emissions levels that would be expected by 2010 without the Protocol, this limitation represents a 29-percent cut. The goal is to lower overall emissions of six greenhouse gases: carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, HFCs, and PFCs - calculated as an average over the five-year period of 2008-2012. National limitations range from 8 percent reductions for the European Union and some others to 7 percent for the United States, 6 percent for Japan, 0 percent for Russia, and permitted increases of 8 percent for Australia and 10 percent for Iceland. One of the projects we are involved in concerns a DHC that after investing in the improvements listed above can sell Emission Reduction Units within the system of the Kyoto Protocol. Another project aims to reduce the leakage of methane from a large gas distribution network. However, in Russia the legislative and institutional framework necessary for the proper implementation of projects under the Kyoto protocol is not yet in place.

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