Page 31 - bne magazine February 2022_20220208

bne February 2022 Companies & Markets I 31
The Ministry of Economy’s plan so far is spread across a number of sectors, but is concentrated on improving energy efficiency and management, eliminating emissions through leakage, and undertaking various forestry projects. The most expensive heavy capex version of reducing emissions is going to be put off until later, after 2030.
“The cheapest decarbonisation options in Russia are still cutting methane emissions (in both oil & gas and coal mining), reducing the power sector’s footprint (through a greater
share of renewables) and forestry projects. These three areas account for 59% of gross national emissions, on our estimates, with the full decarbonisation of these industries costing RUB102.7 trillion in capex,” VTBC said.
The oil, gas and power companies will bear the brunt of the costs in the first stage, but reducing their methane leakage will be negligible for the hydrocarbon producers.
The greatest effect on consumers from these investments is going to be the upward pressure on electricity prices. VTBC estimate that end-user electricity prices would need to rise 28% to accommodate sufficient decarbonisation funding for the sector (in a 100% scenario).
Later on, the mining and transport sectors are going to be
the expensive ones. VTBC estimated that transport alone will consume a third of the entire RUB480 trillion that is going to be invested, or about RUB145 trillion, as the railways will have to replace its entire ICE fleet with electric vehicles.
However, costs will go up everywhere. With a focus on avoiding the capex-heavy solutions, the answer will be to improve energy efficiency and savings everywhere. That means things like new regulations for washing machines to force them to switch to more efficient motors, better waste management, retooling factories everywhere and investment into construction efficiency. And decarbonising households is one of the most expensive options for the economy and unlikely to start at the beginning, as those costs will fall on the public. “We do not anticipate any rapid decarbonisation of the average Russian household until 2060,” says the
VTBC analysts.
A large share of these costs can be pushed on to the companies and VTBC estimates they will add some RUB7.4 trillion ($54bn) in annual additional payments for the goods and services. All this together will probably send prices up by about 12%.
“Our study shows that full decarbonisation would require
a significant step-up in investment across the sectors (except for oil & gas). For some sectors, such as power, transport and chemicals, this step-up might translate into a two-three-fold increase in investments. However, we note that the existing CO2 reduction targets are milder and can generally be dealt with as part of Russian corporates’ announced investment programmes (except for the power sector),” says VTBC.
All this spending will also be a heavy burden on Russia’s investment case, as it will eat into free cash flows that are currently being paid out to dividends to shareholders; Russia currently has the highest dividend payout yields in the world – about twice those of the MSCI EM benchmark average.
As much of the capital expenditure will actually borne by companies and not the government, the amount of money they will have invest will also eat into their profits. VTBC estimates that in most sectors the current capex spending in most companies’ business plans is insufficient to cover the necessary investments to reduce emissions by the required amount. The extremes are in oil & gas, where the companies have plenty of money and the investments are relatively cheap, and the power sector, where the investments are huge and could wipe out the sector’s entire profits.
Government’s targets
The government, of course, will also play an important
role and has targeted boosting Russia’s renewable energy capacity and expanding its already extensive nuclear power production. Despite the legacy of Chernobyl, Russia’s nuclear technology is now considered to be world class and Russian nuclear exports are booming as a result.
The government also plans to significantly step up
forestry projects and launch wide-scale carbon capturing, predominantly by oil & gas companies. Further down the
line more of Russia’s hydrocarbon reserves will be re-tasked from a fuel for export to become the feedstock for a hydrogen production business. Although decarbonisation measures
are planned in other sectors as well, the lion’s share of the activities will be concentrated on measures to keep Russia’s CO2 abatement curve relatively low.
“MinEconomy’s intensive decarbonisation strategy scenario envisages using the best and most efficient technologies, with measures to introduce, replicate and expand low and carbon-free technologies, encourage the use of secondary energy resources, change the tax, customs and budgetary policies, and develop green finance,” the VTBC analysts said.
“There are also measures to preserve and increase the absorptive capacity of forests and other ecosystems, and support technologies for capturing and utilising greenhouse gases [GHGs]. The strategy requires GHG emissions to be reported, rather than the requirement of the potential carbon pricing and trading quotas (the preliminary version envisaged it coming into operation after 2030, at RUB500-700/tCO2e),” VTBC concluded.
MinEconomy estimates that by 2050, this would make it possible to cut emissions 60% from the 2019 level and 80% from the 1990 level. The total investment for decarbonisation is estimated at 1% of GDP in 2022-30 and 1.5-2.0% in 2031- 50. The additional growth in GDP due to this investment is expected to exceed the spent funds by 25%.
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