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24 I Companies & Markets bne July 2021
Most of Russia's coal reserves are in the Kuznetsk and Kansk- Achinsk basins. Russia is the fifth-largest consumer of coal in the world and is the sixth-largest producer of coal. Over two- thirds of coal produced in Russia is used domestically.
The percentage of coal in Russian power generation has been declining since 1990, when it was 20.7%, due to rising gas consumption as well as increasing nuclear and hydroelectric energy output. Currently only 14.4% of Russia's power is produced from coal.
However, coal remains a major fuel in the power industry and in the new energy strategy to 2035 the use of coal could increase by half.
Last summer, the Russian government approved an energy strategy that would see coal output rise from 441mn tpy in 2019 to 485mn-668mn tpy by 2035.
Private and state firms are working to expand coal ports and rail transport capacity. Last year, Russia saw the launch of its biggest underground coal mine, Inaglinskiy. “There hasn’t been a construction project like this since Soviet times,” its backers said.
“Now we understand that we have a lot of coal that, very soon, no one is going to need,” he said. “If we don’t sell it in the next 10-20 years, there won’t be any point in mining it.”
Russia’s government is confident that coal use in Asia will continue to grow for some time. “Growth prospects are primarily related to the growing market of the Asia-Pacific region,” Deputy Prime Minister Alexander Novak said in a coal report last year.
However, most of the progress so far as been made by the companies, which have been putting ESG policies into place in the last year, with the focus on the environmental element only expected to become more relevant for investors.
Russia remains a big producer of coal from the coal-mining heartland of Kuzbass, most of which is using in power stations, which in turn cause just over half (53%) of Russia’s GHG emissions.
Russia has reduced emissions dramatically since the Soviet era, not because utilities’ management went green, but more because they simply invested into more efficient and profitable equipment that reduces emissions as a side-effect.
But that changed in October 2019 when the Italian-owned Enel Russia power company sold its coal-burning power station and got out of carbon completely, promising to invest the proceeds into renewable power. It was a dramatic decision, as the Reftinskaya coal-powered station accounted for a third of the company’s entire revenue but was its only exposure to GHG-emitting power generation. Investors loved it. Although the company reduced its revenues and will have to increase
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its debt, the company’s stock price soared as Enel became the leading green power producer in Russia at the stroke of a pen.
The rest of Russia’s energy-intense industrials have been moving more slowly, but the looming EU Green Deal has spurred them into action more recently.
Major Russian aluminium producer RusAl – the biggest single consumer of power in the country – is already switching from coal-burning power supplies to hydro in an effort to reduce its carbon footprint, reports VTBC, and is considering completely ditching its coal-fired power plants and coal mines. More recently RusAl announced that it was breaking the company into two separate pieces – the clean from the dirty – that is supposed to facilitate its reduction of GHG emissions.
But investment is still going into coal mega-projects.
A-Property plans to invest a further $1.7bn on Elga’s development and sees it as part of a far eastern industrial cluster, together with the gas producer, another coal mine and a coal-loading port on the Sea of Japan.
Mechel, a mining firm controlled by Igor Zyuzin, bought the licence to develop Elga in 2007, spending $2.3bn to acquire it as part of a regional coal complex. It invested a further $1bn on developing Elga.
Founded in 2003, Mechel spent its early years aggressively buying up metals plants and the coking coal mines that could supply them. By the time the 2008 financial crisis hit, Mechel had taken on $5bn in debt.
In 2020, Zyuzin decided to sell. Enter Elga’s unlikely
new owner, Albert Avdolyan, who made his money in telecommunications. His investment firm, A-Property, bought Elga for $1.9bn.
The scale of Avdolyan’s vision is huge: Elga’s new managers have been tasked with lifting output from 4mn tonnes of coal in 2019 to a staggering 45mn tonnes by 2023.
Moreover, the coking coal that Elga produces is used primarily in the production of steel. It has no ready replacement, and so demand remains strong. According to the International Energy Agency (IEA), “substitution of steel production from iron ore at scale without coal is not expected in the near term.”
Asia
China is by far the world’s largest consumer of coal for power generation, accounting for 53% of total global coal generation in 2020, according to the think-tank Ember.
The government says that 72% of China's power came from coal in 2005, falling to 56.8% in 2020, with a target of 56% for 2021.
However, in absolute terms, Chinese coal generation acutely grew by 18% between 2015 and 2020, and by 1.7% between