Russia's ‘green oligarchs’ struggle

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When Sergei Tishkin, a Russian economist, set up Ensat, his Moscow-based company, a little more than a decade ago, he found that potential commercial clients were puzzled when he approached them with ideas for saving energy. Because Russia has so much gas, oil and coal, “there was a lack of understanding about why we need to save energy”, he says.

Today, Ensat still struggles to get the message out, but at least Dmitry Medvedev has caught on. The Russian president has made energy efficiency a national priority, identifying the lack of it as one of the chief reasons the Russian economy is “falling behind” internationally – and setting a goal of slashing wastefulness by 40 per cent by 2020.

In November, a landmark law on energy efficiency was passed, outlining the government’s strategy to encourage energy-saving over the next decade. It represents a potential bonanza for companies such as Ensat. Energy service groups are few in number in Russia, but they are well-placed for a windfall if and when the conditions become right.

Russia’s economy is one of the world’s most energy-intensive, with each unit of production using roughly twice as much energy as it would in China and six times the amount in the US. Bringing this down would save billions – while creating huge volumes of business for the companies selling the technology.

In a study last year, McKinsey, the US consultancy, estimated that investments in energy-saving technology would total €150bn ($198bn, £124bn) during the next two decades, with an internal rate of return of more than 30 per cent, equalling savings of €345bn in the same time-frame.

In spite of the big numbers Mr Tishkin is not getting excited yet. A lot more must change first. “It should be a market worth billions of dollars a year. But this is still in the future,” he says. “No one is standing in line . . . It is our job to convince the client that it is in their interests.”

The key for companies such as Ensat could be the widespread introduction in Russia of “energy service contracts” – a form of outsourcing already established in many other countries. In this type of deal, the client pays the energy service company to install new technology and then pays it a percentage based on the savings. The aim is to make the technology affordable and less risky for the buyer. For this to take off in Russia, however, will require new laws, legal infrastructure and long-term finance, which is notably lacking.

“It is one thing to go into a bank for a loan and say ‘I am going to sell this thing and make this amount of money’,” says Stephan Solzhenytsin, one of the authors of the McKinsey study. “But it is another thing to go to a bank and say ‘I am going to save a certain amount of energy and be paid with the savings’. Banks won’t understand that, and it’s a much tougher sell.”

Igor Golubev, general director of Moscow-based Giprokommunenergo, an energy service start-up, says the new contracts are still too risky for both sides. For example, if a company cuts costs after moving to energy-saving lightbulbs, it is hard to measure how much of the saving is down to the lightbulb and how much is down to lower use of the lightbulb.

Giprokommunenergo’s contracts are mostly with municipal authorities. In the city of Vorkuta, north of the Arctic Circle, the company cleaned heating batteries in residential buildings, which meant they worked 30 per cent more efficiently.

The government’s biggest boost to energy-efficiency suppliers has been indirect, says Mr Golubev. By liberalising energy costs, government policy has led to price rises and higher demand for efficiency. Every year electricity prices rise by about 15 per cent for commercial users in Russia, says Mr Golubev. This is still relatively cheap – a kilowatt hour in Moscow, one of Europe’s most expensive cities, costs about a fifth what it does in Italy – but the price rises nevertheless “provide a stimulus”.

For the public, there is no equivalent stimulus as most consumers are not individually metered in apartment blocks.

Meanwhile, Russia’s aspiring “green oligarchs” say much of the resistance among companies to improved energy efficiency stems from an entrenched business culture.

This is borne out by Vent Design, a Novosibirsk company selling energy-efficient industrial fans, which has faced an uphill battle to interest potential clients. A recent attempt to sell to a state-owned sawmill in Krasnoyask did not go well, says general director Nikolai Rubtsov, who says he tried to pitch equipment that he believed would pay for itself in two months and add Rbs3m ($100,000, €75,000, £65,000) profit per year.

“The money men, those close to the financial side of things refused,” he says. “They didn’t want to spend the money to invest ... There are a lot of interests in Russia who live off energy and don’t want to see people buy less of it,” he says.

If the world economic crisis has done anyone any good, it may have been Russia’s extravagant users of energy, suggests Mr Tishkin of Ensat. He says it was a wake-up call for the Kremlin, which has become used to high growth rates fuelled by oil.

“The economic crisis was a real breakthrough,” he says. “They looked at their growth targets and realised the only way to get to [them] was by increasing efficiency.”

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