When Inefficiency Pays Off

Schneider Electric

Russia's infrastructure wastes energy on a scale that is practically unrivaled. But it offers Energy-efficiency firms a business opportunity with government backing.

Leaky power plants. Poorly insulated apartments. Central heating systems that you can't turn off. Russia is probably one of the most wasteful energy users in the world.

But for companies that specialize in tackling such problems, it is an ideal customer.

It is difficult to overstate the scale of energy waste in Russia. A 2008 report by the World Bank and International Financial Corporation found that Russia wastes as much energy each year as France consumes. They cited the International Energy Agency's explanation that France used 275.97 million tons of oil equivalent in 2005. Russia used 646.68 million tons.

In terms of efficiency, that means Russia used 0.42 tons of oil equivalent per dollar of gross domestic product in 2005, while France used just 0.14 tons of oil equivalent.

The Russian government isn't blind to the problem. In 2008 it set a target of reducing the country's so-called gross domestic product energy intensity by 40 percent and obtaining 4.5 percent of the country's energy from renewable energy by 2020.

That was followed in 2009 by a law on energy efficiency introducing mandatory efficiency guidelines for buildings and laying out financial and legal incentives to encourage conservation.

At the time, the legislation was little more than words. The bill was "framework" legislation that required the passage of 38 bylaws to make it active. It coincided with the promotion of President Dmitry Medvedev's buzzword, "innovation."

Nonetheless, some Western energy companies took the bill as a sign that the political wind was changing and hurried to enter the Russian market.

The French have been leading the way on a handful of conservation efforts. French companies such as Lafarge were instrumental in planning the renovation of the World Wildlife Fund's headquarters in Moscow. The plans to turn the building into the capital's first "eco-house" were unveiled at a ceremony at the French Embassy in February.

In March, French Ambassador Jean de Gliniasty again presided over an energy-efficiency project: the opening of the French-Russian Energy Efficiency Center.

More of a bilateral center for exchanging ideas on efficiency than a profit-making exercise, it is backed by firms such as energy management specialist Schneider Electric, electricity holding EDF and power generation and grid company Alstom.

Efficient energy

It's clear now that energy efficiency is on the country's radar and part of government plans, said Alstom's Lavrinenko.

Today, 36 of the needed 38 bylaws have been passed, and there has been a recent tie-up between the International Financial Corporation and the Russian Energy Agency, the department created in 2008 to implement the energy efficiency strategy. Those developments have enhanced lobbyists' access to government, leading to a general sensibility that energy efficiency is the right horse to back.

In December the government approved a state energy efficiency program through 2020 — a binding document that envisages investments of 9.53 trillion rubles ($335 billion), with 695 billion rubles in state spending — over the coming decade.

"The signals that have been sent are very important," said Andrei Lavrinenko, vice president of Alstom in Russia. "It's clear now that energy efficiency is on the radar, and it has been factored into the government's plans for the future. It is not a passing fad they are going to forget," he said.

French energy companies have been making a vigorous assault on the Russian market. In March, regional electrical grid operator MRSK Holding gave ERDF Distribution, the grid operating subsidiary of EDF, the right to run the Tomsk Distribution Company. ERDF's tasks will include improving financial performance and upgrading equipment and safety standards. The final contract is expected to be inked at the St. Petersburg Economic Forum this month.

In February, Alstrom and RusHydro, the state-owned monopoly controlling most of Russia's hydroelectric dams, agreed to set up a joint venture for producing equipment for small-scale hydro stations in Bashkortostan. In May the parties said RusHydro would be taking control of the venture, with a stake of 50 percent plus one share.

Earlier, in October 2010, French construction material maker Saint-Gobain and Turkish glass producer Trakya Cam agreed to invest 184 million euros ($257 million) into a new factory that will make window glass for the construction and automotive industries in Tatarstan.

Changing Minds

But even the pioneers admit it is still very early days. "In Russia setting up [energy efficiency] is a young process, and it faces the same difficulties as any just-started process: a lack of methodology, norms and regulating rules," explained Jean-Louis Stasi, country president for Schneider Electric.

Rules are one thing — but mentality is another. In a country accustomed to having an abundance of oil and gas, convincing people to consider wise energy use in the first place can be an uphill battle.

"We can't do anything unless we get people to think about energy efficiency as a matter of course, to bring that thinking into the mainstream," said Timur Ivanov, head of the Russian Energy Agency in an interview at the agency's Moscow headquarters.

Ivanov added, "Unfortunately, there are lots of people who say, 'We have lots of oil and gas, why shouldn't we use it?' and others who just assume energy efficiency means losing money."

Ivanov's agency has made public awareness campaigns one of its priorities.

Schneider Electric has joined the awareness effort with gusto. In fact, it offers free online courses on conservation through an "Energy University" on its Russian-language web site. The courses — covering subjects like alternative power generation technologies, energy efficiency, energy audits and heating, ventilation and air conditioning (HVAC in industry jargon) — are meant to "provide the latest information and professional training on energy efficiency concepts," Stasi wrote in an e-mail interview.

There are problems beyond the scope of continuing education, however, and control of the companies themselves.

The government has long promised to ease strict controls on the rates that utilities companies charge end consumers — especially for gas, with its heavy government subsidies.

But Prime Minister Vladimir Putin in February criticized the government for allowing prices to grow too fast in the regions, and regulators have since signaled that they may tighten rather than loosen controls. Investors in turn complained that "mixed messages" were stymieing the reform package.

"The truth of the matter is that one of the best ways to get people to cut energy usage is to make them pay for it. But that's not going to happen in Russia in an election year," remarked a Russian energy agency official, who asked not to be named because of the frank nature of his comments.

Homes and Houses

The housing sector is the second-largest end user of energy in Russia, and according to the World Bank's report, it has the "greatest energy savings potential."

Another way of saying it: That sector accounts for the most waste — in fact, for 35 percent to 49 percent of total 2005 final heat consumption in 2005. By far the most obvious attempt to sway public opinion was backing the WWF "eco-dom" — a flagship effort backed by the Moscow city government to demonstrate that an energy-efficient house can be built or renovated in the heart of the capital.

Several French companies also are using the flagship as a showroom for their own products. Saint-Gobain provided insulation materials. Lafarge was even able to boast that the cement in the foundation would be "green," because the company used alternative fuel and partially ash and slag instead of clinker in its production.

The new eco-dom, scheduled to be completed by next year, is meant to showcase the potential of energy-efficient housing.

But, like the electricity tariffs, energy-

efficient construction will require the help of legislation before it can take off.

The WWF admits that the costs of the renovation would have been 30 percent to 40 percent higher without generous contributions from various companies. Without those funds, the cost of the renovation would be a prohibitive 3.5 million euros.

Heating Hell

One reason for the inefficiency of Russia's housing is improper insulation, and insulation is a product that Saint-Gobain is selling furiously. But probably the biggest problem is a legacy of Soviet town planning — communal heating.

In most Russian towns, water is heated in central power station and then piped around town.

Most Russian homes don't have boilers or meters measuring how much hot water they're using. Hot water for both the shower and central heating is piped in from outside the apartment.

Homedwellers in Russia wait for the heating to be turned on in autumn and then turned off again in spring. In summer, they have to make do without hot water for several weeks while the pipes are checked.

It's a mixed blessing. For surrendering the control of your heating and tolerating the discomfort of frigid showers in the summer, you are virtually guaranteed cosy warmth throughout the winter without the headache of a steep bill.

Dalkia, EDF's energy services subsidiary, has spied a massive opportunity.

In 2009 it signed a 25-year leasing contract to manage several heating systems in Slantsy, a town of 40,000 people in the Leningrad region outside St. Petersburg.

As part of the deal, the company is making an investment to upgrade the principal heating plants, convert the smaller plants into substations and renovate 89 kilometers of network. In 2009, its first year in Russia, Dalkia had just 292 employees and controlled 8 million euros in revenue — a drop in the ocean compared with its operations in the other 41 countries it works in.

But as the firm crowed in its 2009 report, "Russia accounts for 56 percent of the world's market for heating networks and has a substantial need for new and more modern facilities." It is, in other words, a goldmine.

How Smart Can You Be?

But the ultimate goal is far deeper than better home insulation or more efficient energy generation. The real change can arrive when devices use only as much energy as required — and when generators don't produce any more than that.

This is what proponents call a "smart grid," and one of the biggest evangelists is Schneider Electric's Stasi.

"Today's grid functions in a top-down way. Tomorrow's smart grid will be bidirectional: Electricity will flow out of homes and offices as well as into them," he told The Moscow Times earlier this year.

The idea: Sources of renewable energy such as solar panels and wind generators will let offices and homes generate part of their own energy demand and even sell the excess back to the grid; software will allow immediate transfers of electricity or heat meter information, to give energy companies a real-time view of consumption; and consumers will be able to adjust consumption immediately to peaks and troughs in utility prices.

Companies like Schneider see opportunities in developing the software and offering the management services to run these systems.

But the smart grid isn't actually a product or a solution on sale. It is a concept — Schneider calls it a "revolution" — that environmentalists and some energy companies are pushing as the answer to the planet's energy dilemma.

"Sure, it's a project for the future, the reality of which very much depends on the conditions of the country. But the technical execution of the project is quite real to our company even now.

"It's a hot topic in Europe and a strategic project for our company. We're investing a lot in it and expect a lot from it, and not only in Russia," Stasi said.


Russia - France 2011
Russia - France 2011
Companies from France make up a sizable part of Russia’s business fabric, and French firms' strategies are covered in-depth in this supplement. What's more, for the first time in our country supplement magazines, you can view the extent of French business activity by federal district in a specially designed map.
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