Energy of no alternative

In August of this year, Deputy Minister of Energy of Russia Vyacheslav Kravchenko stated that about 20% of the capacity of all power plants in Russia must be replaced before 2040. Many thermal power plants were built in the middle of the last century, their life expectancy been about 50 years, more than few of them will need to be shut down soon. Without replacement capacity, there is a risk of energy shortages in various regions of the country. The Ministry of Energy plans to replace aging stations with new thermal power plants running on coal and gas. This plan is expensive and risky, and there is an alternative.

In Russia today, building wind power plants (WPP) is cheaper than thermal power plants (TPP). At the same time, renewable energy does not need any kind of support that is different from the support of traditional energy. The tenders for the construction of thermal power plants and wind power stations this summer showed the price advantage of the WPP – kWh produced by the WPP will cost almost two times less than kWh TPP – 6.5 rubles versus 11 rubles (9,5 cents vs 16 cents, US). But the price is not the only advantage. Investment projects for the construction of thermal power plants are more risky than renewable energy sources (RES) projects. Currency risks loom large. Gas turbines, a central part of TPP’s,  are not produced in Russia, they need to be imported and paid for in dollars and euros. Constant fluctuations in the ruble exchange rate and the unpredictability of new sanctions increase investor risks.

Russia manufactures locally some equipment for thermal power plants — steam turbines can be an example. If you build TPPs operating on steam turbines, you can avoid the risks of currency fluctuations and sanctions. But in this case, you are missing the chance to make the Russian energy system modern, using the latest technology. Steam turbines are technologies of the past century, reliable, but not manoeuvrable, not capable of quickly adapting to changes in demand. This is going steam-punk instead of cyber-punk — steam engines and a lamp-powered blockchain, instead of virtual reality and a neural interface.

Renewable energy have long been considered a whim of Europe and China, any serious talk about renewable energy sources in Russia was only in the context of energy supply to remote areas of the Far East. Today, low cost, insensitivity to sanctions and several independent local producers of wind turbines and solar panels have turned renewable energy from alternative energy to energy with no alternative.

It happened very quickly, in just two years. It is not surprising that even the main public proponent of renewable energy, Anatoly Chubais, speaks only of 10 GW of renewable energy sources in the country’s energy balance. I believe that the whole modernization program, all 40 GW, can be implemented using only RES. In this article, I justify my position by analyzing the cost of energy from renewable energy sources and thermal power plants, considering the possibilities and risks of manufacturing equipment in Russia, debunking some of the myths about the operation of renewable energy in the energy system and conclude on the kind of support that should be provided to renewable energy sources in Russia. On the last point I’ll give you spoiler immediately – no support is needed, except for the one that will be provided to thermal stations.

Cheaper than gas

To get an idea of ​​what the modernization will look like according to the scenario of the Ministry of Energy, just look at the results of the tender for new thermal power plant  in May-June of the current year. The purpose of the competition is the construction of a thermal power plant with a capacity of up to 450 MW on the Taman Peninsula to cover the summer peak loads of the region. Natural gas is to be the main fuel of this TPP. The cost of building 1 MW of capacity was played out at the competition, and the kWh price itself can be calculated from the winner’s bid. As the results of the competition, the price did not fall much from the start, having stopped at about 1600 rubles per MW per month. If we recount the winner’s application into a single price of electricity, then we get about 11 rubles (16 cents) per kWh.

Now let’s look at the results of another competition, this time between renewable energy projects, held in June, immediately after the tender for the construction of a thermal power plant in Taman. Four participants applied. The fall in prices from the start price was up to 50%. If we recount the result of the winner of the competition in the price of kWh, it turns out that such a wind farm will sell electricity at 6.5 rubles (9,5 cents) per kWh. Once again – the new thermal power plant will sell electricity at 11 rubles per kWh, and the new wind power plant will sell electricity at 6.5 rubles per kWh. This is based on the results of tenders for the construction of new facilities this year in Russia. Not in Europe. Not in China. In Russia.

I have no reason to believe that the Taman competition is an exception, and that other TPPs will supply cheaper energy. Today renewable energy sources can withstand direct price competition with thermal power plants, then why not let competition decide which power plants should be built? Since there is no explicit request for environmental improvement in Russia and we are an energy independent power, further development of renewable energy makes sense only if the price of electricity for renewable energy will be cheaper than electricity from traditional sources. Direct competition of renewable energy projects and thermal power plants is not new, such “technology-neutral” competitions have already been held in the world, and renewable energy projects have won. I am not aware of any legal or practical restrictions to such direct competition.

By planning to upgrade the power system, instead of betting on expensive and risky technologies, the Ministry of Energy could allow, or even require, direct competition between different sources of energy. At the same time requirements for construction completion times, generation flexibility, energy quality, and so on can be uniform for all sources. I do not see the point in predetermining the type of energy supply source by officials of the Ministry of Energy, when the market can do this much more efficiently.

Where are the turbines?

The lack of alternatives to renewables and wind power becomes apparent if you look at the risks associated with the import and production of turbines – the main piece of equipment of power plants. Low prices at the last competition of renewable energy sources were obtained, among other things, because of a large and long-term order from three customers was placed, making it possible to start mass production of wind turbines. Although no wind turbine has yet come out of the Russian plant, long-term contracts with stringent localization requirements have already been signed with most component suppliers. At least three companies will produce Russian-made wind turbines – Vestas, Siemens-Gamesa and Red Wind.

Manufacturing equipment for thermal power plants in Russia faces a higher risk of increasing the cost of equipment than in wind power. The first problem is that Russia does not produce high-quality gas turbines for thermal power plants. They will have to bought from Siemens, GE or Mitsubishi. Recently Siemens, together with Power Machines announced plans to localize such turbines for thermal power plants in Russia. Since no one else expressed readiness to localize the production of gas turbines in Russia, if the plans of Siemens-SM will work out, we will get sort of «Rosturbinmash», another monopolist dictating conditions to the utilities. I am sure that neither GE nor Mitsubishi will post production of gas turbines in Russia – due to sanctions and lack of prospects in the industry.

The construction of thermal power plants using steam turbines, widely available in Russia, and therefore not subject to the risks of sanctions, is a road to nowhere. An order for 40 GW will become a swan song for an already dead technology, since the demand for steam turbines have been low worldwide. Sales of all types of heat turbines are falling – from 2013 to 2017, orders for gas turbines worldwide fell by 40%. According to Bloomberg New Energy Finance, by 2040, the production of electricity based on renewable energy will be 40% of the total electricity generation on the planet. In this situation, Russia and several other countries will be the only customers of steam turbines.

So, most likely 40 GW of gas turbines will be purchased in Germany, USA or Japan. There are two problems with importing turbines – it is difficult because of sanctions, which are not expected to be canceled in the near future, and expensive because of a weak ruble. In such circumstances, the turbines can rise sharply in price or simply become unavailable. An attempt to localize production, for example of Siemens turbines, will not differ much from their import, since main components of turbines will still be made abroad. Even if it will be possible to import turbines, and the ruble will be stable for some time, the risk of increasing the cost of servicing turbines persists, since it is fixed in foreign currency. Equipment manufacturers have long since switched to a service model, in which the manufacturer’s main margin is formed through post-sale service. Utilities will face currency risks throughout the life of the turbines.

Manufacturing of solar panels and wind turbines is not subject to the risks of sanctions and fluctuations of the ruble exchange rate, since most of the components are produced in Russia. Maintenance of wind turbines and solar farms is times cheaper than any thermal power station, and it cost is fixed in rubles. The reality is that in Russia only wind turbines and solar panels will be mass produced, the production of steam turbines will gradually wither, and the production of gas turbines will not be established. In this situation, I would not plan to upgrade 40 GW of the power system on obsolete or non-localised technologies.

Isn’t it risky to introduce 40 GW of renewable energy sources into the power grid?

Despite the obvious price advantages of renewable energy and the availability of local competitive manufacturing, the decision on the admission of renewable energy to the modernization program will not be made until the Russian energy sector gets rid of the myths about the instability of renewable energy. For example, it is widely believed that power generation from renewable energy sources is unpredictable, and with large amounts of renewable energy there is a risk of destabilization of the power system. As power generation from renewables cannot be controlled, therefore, for the stability of the power system, 100% back-up, including energy storage systems, is necessary. The need for such redundancy supposedly dramatically increases the cost of electricity RES. There are many other concerns about the destabilization of the energy system with an increase in generation from renewable energy sources, but all these concerns have already been removed by the practice of countries with a large share of renewable energy, whose experience has been repeatedly described in the literature, for example, in the IEA reports. Let me draw attention only to two main myths, which in many respects impede the large-scale development of renewable energy across Russia.

The first myth is that the energy system will not cope with the unpredictability of renewable energy, which could lead to its collapse. Energy systems are designed with a sharp and unpredictable load changes in mind. In small amounts of generation, the stochasticity of renewable energy sources is lost in the noise of natural fluctuations in demand. When renewable energy share becomes larger, the irregularity of the production of one turbine / solar panel is compensated by the irregularity of the production of other renewable energy sources. Finally, modern wind turbines are equipped with equipment that excludes the possibility of a sudden shutdown.

The second myth is that wind energy requires energy storage systems and back-ups, so it is more expensive than traditional energy. First, the reserve is formed for the entire energy system, and not for its individual object. I am not aware of the requirements for installing storage at wind farms, either in Russia or in other countries. In the absence of storage in the power system, its flexibility and reserves are provided by networks, manoeuvrable hydroelectric power stations and thermal power plants.

IEA studies show that renewable energy generation can reach almost half of the total power generation in the power system, before additional redundancy measures are needed. Practice confirms this – the share of renewable energy production in Denmark from wind energy is 40%, and the reliability index of the power system is one of the highest. If we imagine that renewable energy will replace all the capacities of power plants under the modernization program of the Ministry of Energy until 2040, then the share of renewable energy in the installed capacity of all power plants in Russia will not exceed 16%.

Direct competition

For me, the main discovery of this year was the ability of RES to withstand direct competition with thermal power plants in Russia. This significant event in the Russian energy industry has remained largely unnoticed, and have not started a wide discussion. Instead, what was continued to be discussed are next special tariff for modernisation of thermal power plants and separately – the continuation of the renewable energy support program, although there is no difference between these issues from the point of view of the consumer and from the point of view of the power system. The only difference is who gets orders for equipment, construction, and who can better formulate the term “reconstruction” in order to get a new long-term power tariff for replacing a pair of bolts and painting curbs.

The results of the two contests of this year created a unique opportunity for the Russian energy sector – the opportunity to make a qualitative transition to a new model of organization of the power system. In this model, the power system is more reliable – because it is decentralized, because it has consumers with its own production, because it works on modern equipment of domestic production. The most remarkable thing is that the motivation for such a transition is purely economic – renewable energy is cheaper than thermal power plants and the implementation of renewable energy projects does not bear the risks of thermal projects. All that is required is to allow direct competition between renewable energy projects and thermal power plants. No new support mechanisms. No renewal of support for RES.


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