Russia’s CHP challenge

Cogeneration plant in the city of Vladimir, Vladimirskaya Oblast
Cogeneration plant in the city of Vladimir, Vladimirskaya Oblast
Credit: Alexxx Malev

High-energy industrial users in Russia see the value of on-site power and self-generation in an environment of rising electricity prices and concerns over security of supply, but technical capacity weaknesses and unsupportive policies are restricting rollouts, writes Mark Rowe

Rising electricity prices and growing fears around supply security are driving Russian industrial power users to construct their own on-site power and combined heat and power (CHP) plants.

‘On-site generation is known as a highly profitable option to improve industrial energy efficiency and for the industry to cover its own power supply needs,’ said the European Bank for Reconstruction & Development (EBRD) in a 2013 report, Unlocking Investment Opportunities in Industrial On-site Generation in Russia. ‘Russian industries are particularly attractive for combined heat and power production, since there are significant industrial heat loads available.’ The bank used to make extensive investments in energy services within Russia, although it currently cannot help because of European anger over Russia’s intervention in Ukraine.

The report added that the Russian market environment is ‘generally feasible for on-site generation in all scales of industries’ due to ‘the advantageous price ratio between electricity and natural gas; the availability of own industrial by-products as fuels; highly efficient power generation if designed in balance with the heat and power demand of the industrial facility; avoidance of high transmission costs; avoidance of high grid connection fees; and the opportunity to sell heat and electricity to external industrial clients through private distribution lines.’

Market drivers

‘The major driving forces are the efforts taken by the companies in order to decrease their own costs for energy and heat supply,’ says Yulia Gladysheva, head of tax and legal consulting at Moscow-based analysis firm Energy Consulting. ‘Despite the relative cheapness of production, power transmission is rather expensive. The considerable distances of energy transmission result in relatively high loss leading to increases in the resource cost. Subsequent to high grid costs, the development of their own energy generation system may be economically more sound for major consumers,’ she explained.

According to Aleksandar Kovacevic, a fellow at the Oxford Institute for Energy Studies, the immediate driver is a little more primal: a desire to shake off the consequences of Russia’s stuttering attempts to liberalise its energy market, and steer clear of the related corruption. ‘The reform of the market went wrong in the mid-voltage sector,’ Kovacevic says. ‘This sector was handed to local tycoons who doubled prices. It’s extremely expensive to access and very unreliable. The people who now own the mid-voltage sector have a purely commercial, profit-making perspective. There’s a lot of corruption.

‘That means it can be more beneficial to co-generate heating and energy than connect to the grid. From an industry perspective it makes a lot of sense.’

For some industries and companies, such as the aluminium producer Rusal which owns large hydropower plants, securing their own on-site energy is relatively straightforward. For other industries, says Kovacevic, things can be more complicated.

According to Moscow-based analysis firm AF Consult, on-site power is particularly attractive to the most energy-intensive industries, such as chemical, petrochemical, iron and steel, and pulp and paper. In these industries, said an AF Consult spokesperson, CHP and, to a lesser extent, on-site power is already widely adopted.

Citing the example of a typical 150 MWe gas-fired CHP plant used by a steel company, AF Consult calculated that the use of blast furnace gas for CHP allows a significant cut to industrial emissions, reduces energy costs by 50%, and on-site generation covers half of the total electricity demand of the steel company. The firm calculates that the investment costs of such a plant are typically €158 million ($193 million), which works out at about €1050/kW.

Contributing factors

According to Yuriy Eroshin, vice-president for power markets and trading at Fortum Russia, gas and coal are the most suitable energy sources for on-site plants. In its 2013 paper on Russia, the US Energy Information Administration (EIA) said that on-site generating capacity in Russia’s industrial sector produced 142 million MWh of electricity in 2011. Of that, 58% was from natural gas, up from 51% in 2000.

Fortum operates nine power plants in Russia. Most of them are CHP plants fuelled by natural gas, including the Chelyabinsk GRES power plant, a TYPE gas power plant with a design capacity of 82 MWe and eight units.

Eroshin also believes that excess on-site power can be fed back into the grid. ‘It is possible to sell as the retailer if the power plant is lower than 25 MW,’ he said, although regulations prohibit sales for on-site power plants with a larger capacity.

The net cost of self-production, says Eroshin, is several times lower than the current market price, based on wholesale market power price and grid transmission. ‘The benefits [of on-site power production] are that they are cost-effective and a more reliable and predictable energy supply, independent of market fluctuations and regulatory restrictions.’

Industrial energy users face other practical incentives, according to Eroshin. ‘The liberalisation of the Russian wholesale power market has just been completed. The wholesale market price consists of the price paid for energy and capacity payments ” the model makes it attractive for the power generating company to be a part of the wholesale electricity market, while in the retail market there are no capacity payments. It drives the big industrial customers ” metal, mining, chemicals, cement ” to on-site generation.’

The EBRD finds that on-site power generation by Russia-based industrial users is key to updating production facilities, as 34% of energy production capacity comes from plants that are more than 40 years old. ‘Increasing industrial on-site generation would help to replace old and inefficient capacity,’ said an EBRD spokesman.

‘It is possible that oil and gas companies perceive construction of on-site power plants as a means of reducing their CO2 emissions and, accordingly, their pollution charges,’ said Elvira Gadelshina, an associate at Moscow-based law firm Khrenov and Partners. ‘Power plants may prevent burning associated petroleum gas in open-air flares.’

A €52 million EBRD loan is to finance a CHP plant in Krasnoyarsk, Siberia
A €52 million EBRD loan is to finance a CHP plant in Krasnoyarsk, Siberia
Credit: EBRD/Yevgeny Kondakov

Lack of policy support

Despite the benefits of on-site power, Eroshin said that the Russian government generally remains unsupportive of decentralising the energy market to accommodate on-site production. ‘The government is not, in general, supporting the issue since, in the long run, on-site production is less energy-efficient and its current attractiveness, if any, is stipulated by regulatory framework rather than actual feasibility.’

Gadelshina agreed: ‘The government does not specifically encourage heavy industrial users to install on-site power systems through subsidies and other means.’

Kovacevic was more emphatic: ‘I don’t think the Russian government is interested. As long as gas consumption quotas are normal they don’t care.’

However, Olga Parfenova, a spokeswoman for BPC Engineering, saw a mixed picture. ‘As long as there are no clear standards and requirements for grid-parallel operation there is a constant problem: how to regulate transfer of surplus power into the grid, and how the customers with on-site generation should be treated. Thus, subsidising or encouragement are actually absent.’

‘On the other hand,’ she added, ‘in the oil and gas sector, companies that implement power-efficient technologies for utilisation of associated gas to generate on-site power receive tax exemptions, which is a good driver for development of distributed generation in this industry.’

Other challenges

The US EIA identified several challenges to a widespread and successful role for industrial on-site power. Despite the importance of Russia’s heat sector, there is no single government authority responsible for its management and development. The EIA said that liberalisation requires cooperation from several distinct bodies, including the ministry of regional development, the Federal Tariff Service and the ministry of energy. The agency concluded that the Russian government needs to do more to promote industrial CHP with overall efficiency thresholds of 70% or greater. The report goes further, and concludes that ‘the fact that the Russian heat sector is closely interlinked with the power sector, given the role of cogeneration plants in power and heat supplies, requires institutional co-ordination between the ministry of energy and the ministry of construction, housing and utilities.’

Another challenge, warned Kovacevic, is the quality of the equipment on the market and the absence of in-house expertise. In general, Russian industries are in poor shape, he said; in fact, they are ‘really devastated’. ‘They only keep the workers and technicians that are really necessary. They don’t have development or energy efficiency departments. That means they rely heavily on contractors and vendors, and they are selling the equipment they have, not necessarily what is most appropriate. There is no single or main kind of cogeneration or on-site power.’

An AF Consult spokesman agreed, adding that ‘industries may have a lack of own personnel with energy and engineering background. There is a need for networking, sharing of experiences and the use of external experts.’

In its Russia 2014 report, the International Energy Agency spells out in stark terms the importance of on-site power and cogeneration to industrial users in the country. Cogeneration accounts for 30% of all heat production; natural gas accounts for 60% of cogeneration and on-site power (around 72 bcm in 2012); coal (20%) and oil products (5%). Heat supply chain losses ” in generation, transmission, distribution and end use ” can be as high as 60%, though the average is between 30% and 40%.

However, according to data from AF Consult, industrial on-site generation represents only 6% of total electricity generation in Russia, although this share may be larger since not all industrial on-site generation is reported. Industrial on-site generation covered only 19% of industrial electricity consumption in 2010, though this share is rising from a low of 14% in 2004, it said.

AF Consult added that the total efficiency of a modern CHP plant is 85%”90%, whereas at a condensing power plant, more than half of the fuel energy is lost as waste heat to the environment. ‘Industrial heat consumption provides a special opportunity to produce electricity at a highly efficient CHP facility,’ said a spokesman.

The potential to feed excess electricity into the grid is significant, according to AF Consult. But the opportunity to sell heat and electricity to surrounding industries depends on a number of factors, including conditions for market participation; cost of grid connection; regional and local requirements on permitting; and local prices of electrical energy, capacity and transmission.

Future momentum

Looking ahead, the push for greater industrial on-site power generation has been given momentum by US-based Capstone Turbine Corporation and Moscow-based BPC Engineering. In 2013 the two firms began installing an order for 100 microturbines to provide greater energy security and efficiency at modular power stations across Russia. The microturbines are fuelled by untreated associated gas from well sites that would otherwise be flared and the gas wasted.

An additional appeal, according to BPC Engineering (Capstone’s Russian distributor) is that this process enables heavy industrial users to avoid costly emissions penalties, as well as reduce on-site power costs. BPC Engineering technology has been installed at major Russian companies and sites such as those run by Lukoil, Gazprom, RussNeft and Orenburgneft. Other clients include the Yakutcement cement plant, where the company installed a 2 MW power plant, and the Basalt Materials Plant with a 4 MW power plant, both in the far eastern Yukutia republic.

In late 2103, the Verhnebakanskiy cement plant in Novorossiysk installed a twelfth Jenbacher J624 gas engine from GE to boost its on-site natural gas power plant. The plant’s capacity was upgraded to 2.3 million tonnes per year in 2011, at which point the plant installed 11 4 MW Jenbacher J624 units. The latest capacity upgrade will further aid the company’s efforts to minimise energy costs. The on-site power station uses natural gas provided by a local pipeline.

However, Kovacevic said that energy producers looking to sell into the grid or achieve self-sufficiency through district heating schemes also face political challenges. ‘Collection of payment [for energy] is very difficult in district heating schemes because a housing block is connected. If you have a housing block with 70 households and 20 do not pay on time, it is hard to get the money. If you cut people off the politicians get angry.’

Outdated power generating technology in Russia needs to be replaced, according to Russia's energy minister Credit: àÅ“à°à‘à‘â€šàµà‘€ à¡à½à¾à²
Outdated power generating technology in Russia needs to be replaced, according to Russia’s energy minister
Credit: àÅ“à°à‘à‘â€šàµà‘€ à¡à½à¾à²

Encouraging growth

According to the EBRD in its 2013 report, several factors need to be put in place to facilitate the growth of industrial on-site power. These include removing discriminatory rules: removal of the rule that requires on-site plants with 25 MW or more of electrical capacity to sell all of their generated power through the wholesale markets; clarifying grid connection rules and consistent technical requirements for the grid connection of industrial facilities; a simplified permit system for industrial on-site generation projects; a law change to enable natural gas and electricity contracts to come into force prior to commissioning; and information campaigns and incentive programmes to raise stakeholders’ awareness and know-how.

Gladysheva feels that western sanctions would not slow down the move to on-site power. ‘As long as sanctions do not apply directly to the equipment used for development of energy generating capacities,’ she said, ‘there is no direct influence on companies engaged in their own energy generating facilities. In the current microeconomic situation, capital investment into their own production facilities is likely to be a successful long-term development strategy.’

Mark Rowe is a freelance journalist focusing on energy matters