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60 I Eastern Europe bne May 2021
Carbon prices in the world
are still used to the Soviet tradition of the state providing power and heat for free, dramatically hiking utilities prices is politically a very sensitive topic, as recent experience in Ukraine has shown where the government recently dropped domestic utility tariffs “temporarily”, much to the chagrin of the IMF. Again, the spread of the possible price increases based on the cost of carbon are very big.
“Our calculations show that CO2 pricing in Russia might drive the end- user electricity price 6-70% upwards, depending on the pricing level chosen,” Sklyar and Tikhonova said.
Premium pricing for green energy
The flip side of utilities having to pay
a tax for emitting GHGs is that utilities can charge a premium for producing green energy. Currently unlike Ukraine, which has seen a tsunami of green power investments thanks to an extremely generous green power tariff policy, only Enel Russia has made a serious attempt to invest into renewable energy.
However, that is also beginning to change and it is also being driven by the growing corporate interest in ESG scores: since the start of 2021 half a dozen blue chip companies, which are also large consumers of power, have been actively seeking
out and switching to green sources of energy. The list includes fertiliser makers Shekinoazot and PhosAgro, petrochemical company Sibur, gold miner Polyus, Russia’s biggest bank Sberbank, multinational consumer goods company Procter & Gamble and aluminium producer Rusal.
“Though the exact terms of these contracts are not disclosed, we estimate that they are undertaken with capacity prices at par with the market average and electricity day-ahead prices
plus a 2-5% premium to the market, depending on the scale, duration and the complexity of the contract,” says VTBC.
But it is early days. These big consumers of power that have elected to use green power sources still only consume an estimated 87mn MWh, or about 8.3% of Russia’s total power generation, but this share is expected to grow rapidly in the coming years.
parsimonious dividend payers, and we expect them to have 5.2% combined dividend yield for FY20F,” says VTBC. “Every company is on the hunt for growth, with dividends of secondary concern.”
Part of the problem is settling on a price for carbon. IMF head Kristalina Georgieva has called for a carbon price that would cause companies to meet the Paris Accord targets, which the analysts say translates into a cost of $75 per tonne. The EU has also already laid out climate disclosure guidelines, but they are not yet mandatory. And the proposed carbon prices vary wildly.
Sweden has the highest rate of $133
per tonne, with Liechtenstein and Switzerland also over $100. Finland and Norway also have high prices of $72 and $57 respectively, but almost everyone else in the EU has proposed prices of between $30 and $10, and another 23 countries price carbon at under $10, with the majority putting the price at under $5. From New Europe the only countries to propose a price are Slovenia ($20), Latvia ($10), Estonia ($2.3), Kazakhstan ($1.2) and Ukraine ($0.4). The global medium carbon emissions price is $11.1 per tonne.
On of the ways to find a workable price for carbon is to allow carbon trading that would let companies smooth out the process of greening their businesses.
“The government envisions a pilot project on CO2 trading to be launched at Sakhalin (Russia's Far East) to reach carbon neutrality for the region by 2025. The project targets CO2 unit trading starting in July 2022, with the duration of the pilot phase until 2025. We are
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November 2020; Source: World Bank
sceptical about seeing any meaningful national carbon price until then,” said Sklyar and Tikhonova.
Russia and other countries will be forced to put a real price on carbon. Currently just under a quarter (23%) of countries have attached a price to carbon emissions and at some point countries that have failed to do so will be seen as trading
at a unfair competitive advantage and will be penalised, forcing them to price their emissions. Emerging markets have been down this road already in the '90s when the US designated countries “non- market economies” as their production took advantage of heavily under-priced, or effectively free, energy thanks to the vestiges of the centrally planned system and hit them with duties to protect its own market.
“We believe the lack of carbon pricing in the medium term will be considered an unjustified competitive advantage, pushing Russia toward more proactive consideration of launching a Emission Trading System inside the country,” says VTBC.
Carbon pricing uncertainty makes it very hard to forecast utilities earnings going forward. VTBC calculated the EBITDA for Russia’s major utilities under four pricing scenarios ranging from the IMF’s $75/t to China’s $6.3/t and found that in the worst- case scenario the carbon costs would eat up all of Russian utilities EBITDA, except for the hydropower company RusHydro, which would only see its earnings fall to zero.
Of course, if these costs are applied then the companies would simply pass on them to their customers, but in Eastern Europe where the population