Russia's secret solar appetite

An appetite for solar emerges in Russia, the UK faces a fracking fight, renewables cop a blow in Australia and EU carbon pricing finally heads north.

Energy Week in Review

Russia goes solar

Bids for Russia's first clean energy auction suggest there is considerable appetite for solar projects in the biggest country in the world. Developers are seeking subsidies for just under 1GW of the technology, reports the electricity regulator Market Council, compared with the 710MW on offer for 2014-17. The other two eligible technologies did not fare as well: no bids were submitted for hydropower plants, and the total requested capacity was well below the available 1.1GW of wind projects. The winners will be announced on 30 September.

It was only in May that Russia approved the decree that set a target of 6.2GW of new renewable energy capacity (excluding large hydro) by 2020 and introduced a new subsidy programme. This will be from a base of 1GW in 2012, according to the Bloomberg New Energy Finance market-sizing tool, of which 92 per cent is small hydroelectric projects (under 50MW).

The country has only 3MW or so of solar capacity, despite its considerable potential. The technology is attracting some interest in the Russian Far East which is isolated from the national energy system. Here renewables stand at an advantage due to high fossil-fuel transport costs. The PV production cost price averages some $US180-240/kW – some 3-4 times less than diesel-fuelled power, according to the national solar power association.

Bidders for the recent clean energy tender may have been attracted by the 14 per cent potential return on investment but they will have to comply with strict rules requiring that 20 per cent of equipment comes from local suppliers. This proportion will rise to 65-70 per cent by 2020. On that issue, the UN Commission on Trade and Development said last week that it was seeking input for its evaluation of the economic and environmental effectiveness of such local content requirements.

A growing number of countries are implementing such standards, with two examples being Brazil and South Africa. However, such policies are questionable under the rules of the World Trade Organization. They can also be almost impossible to satisfy in some countries: recent research from Bloomberg New Energy Finance found that South Africa does not yet have the manufacturing capacity to meet localisation conditions in the country's latest renewables tender.

Despite generous domestic oil and gas resources, Russia appears to be promoting clean energy due to persuasive lobbying from well-connected developers and Prime Minister Dmitry Medvedev's wish to encourage clean, high-tech investment. Russia may also be inspired by the example of some Middle Eastern countries, which have opted to develop renewable energy capacity to free up domestic fossil-fuel resources for more lucrative export.

UK gets fracked off

Talking of oil and gas resources, the UK's Cuadrilla Resources said on Wednesday it was planning to submit a new drill licence application for the site in Balcombe, in the southeast of the country – rather than extend its existing bid. The application for a conventional oil well removes potential ambiguity around the legal boundary, the oil and gas explorer said, and will not include additional drilling or hydraulic fracturing.

Bloomberg New Energy Finance expects more protests at the Balcombe site, which appears to have become the hub of opposition to fracking in the UK. Last month, Cuadrilla suspended drilling there after weeks of anti-shale protests. Local residents and environmental campaigners have opposed the drilling plans, citing concerns that they will contaminate water and cut property prices.

The UK's increasingly vociferous anti-shale movement will have no shortage of targets as the government moves to accelerate the rate of drilling and open more areas for exploration. It plans to drill 40 shale exploration wells over the next two years, said energy minister Michael Fallon in a speech on 17 July in London, and Chancellor George Osborne has promised generous tax breaks to spur drilling of the UK shale deposits, which should replace the largely depleted North Sea fields. But Prime Minister David Cameron faces opposition in his Conservative Party's rural heartland, as we have seen in Balcombe this summer.

The UK may be looking to emulate the US where surging oil and gas production thanks to fracking has lifted the economy: in 2012, the energy boom supported 2.1 million jobs, added almost $US75 billion in federal and state revenue, contributed $US283 billion to GDP and increased household income by more than $US1200, according to estimates in a report released on Wednesday by IHS CERA.

The European country is unlikely to reach such heights, according to Bloomberg New Energy Finance: UK shale gas will not be available fast enough, cheaply enough or in enough volume to take over the price-setting role from imported gas. Shale gas drilling and fracking will also cost more this side of the Atlantic due to the lack of a developed supplier market and high factor costs. Shale gas extraction in the UK could have a capital cost of $US7-12 a million British thermal units compared with US dry gas plays of $US5-6.

And finally, the big news over the weekend came from Down Under where Tony Abbott led the Liberal-National coalition to government. The new prime minister will have to negotiate with minor parties in the Senate to scrap carbon pricing, as the Greens will hold the balance of power until at least the middle of next year. As we discussed in our client call on Monday morning, Abbott will probably succeed in repealing Australia's price on carbon emissions in the third quarter of 2014. Support for renewable energy is likely to weaken as a result.

The Week in Carbon

Carbon perked up as EU delayed auctions and handouts

European Union carbon had its biggest gain in four months last week, as the bloc delayed some sales to 2014 and scaled back free allowances to industry. European Union Allowances (EUAs) for December 2013 gained 16.6 per cent to end the week at €5.33/t, compared with €4.57/t at the previous week’s close. Front-year EUAs had a bearish start to the week – falling to a low of €4.38/t on Tuesday afternoon – as permit auctions returned to full speed and the market prepared for an autumn full of likely additional sales. The December 2013 contract climbed on Wednesday, along with German power prices, and rose above €5/t on Thursday for the first time since April. The European Commission confirmed that day that auctions for 66Mt of permits will be delayed until next year, and free allocation to industry will be cut by 12 per cent through 2020. Meanwhile, UN Certified Emission Reduction credits (CERs) for December 2013 rose 1.7 per cent to close at €0.60/t.

The Energy Week in Review was originally published by Bloomberg New Energy Finance. Republished with permission. For information on how to subscribe to Bloomberg New Energy Finance's daily news, data and analysis on clean energy and carbon markets, click here.

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