Despite Russia’s economy relying heavily on energy exports and production, Russia has been ranked among the least energy efficient countries when compared to other major energy consuming countries. Inefficiencies in energy production, distribution and consumption caused extensive energy wastage during the Soviet era and have still been considered a widespread problem.
Much of the infrastructure has already become considerably outdated and power generation as well as distribution network systems have decayed. Due to poor insulation and leakages, a great amount of heat generated in Russia is lost through distribution channels. To further elaborate on the vitality of energy efficiency in Russia, the Bank of Finland’s senior economist, Laura Solanko points out that, “securing future export volumes requires curbing growth in domestic energy consumption together with securing the current volumes of energy imports. This is why improving energy efficiency will become increasingly important for Russia.”
A considerable obstacle for swift improvement in energy efficiency in Russia can be linked to domestic price levels; especially household tariffs, which have been significantly lower than industrial price levels.
Ordinarily revenues collected would be used to improve the infrastructure and therefore reduce wastage. This has not been the case for Russia, where the price of gas for households has not been determined by sheer economic demand and supply rules but rather subsidized by industries, a practice unique to Russia. To clarify this point further, the World Bank report on Russia’s energy efficiency released in 2008 notes that, “Russian companies currently share in one of the world’s largest energy subsidies, equal to roughly US$40 billion per year.”
The report also indicates that the amount of energy that was lost annually due to inefficiency is “equal to the annual primary energy consumption of France” while also asserting that “Russia can save 45 percent of its total primary energy consumption.”
Another major inefficiency in Russia’s energy production has been with gas flaring, which occurs during the process of burning-off additional vapours (steam) from a well and was considered “one of the greatest inefficiencies in the production of oil and gas in Russia.”
Although estimates of the volume of gas flared into the air vary, President Vladimir Putin acknowledged that more than 20 billion cubic meters (bcm) of gas was flared, while the World Bank claimed that the volume surpassed 38 bcm, which was equivalent to Russia’s exports to Germany in 2006. The 38 bcm of flared gas is almost equal to 5 percent of Russia’s annual production and consequently the country is ranked as the world’s second biggest contributor after Nigeria.
Gas flaring has three major harmful consequences; firstly, it is a considerable loss for the economy, costing billions of dollars to Russia; secondly, the substances released are harmful to human health: sulphur, nitrogen and carbon are emitted into the air, and lastly, greenhouse gas emissions, in particular, increase due to gas leakage into the air.
A report prepared for Global Gas Flaring Reduction by PFC Energy notes that approximately between 30 to100 million tons of emissions are created by Russia annually, which is the amount produced only if gas is burnt efficiently, which is rarely believed to be the case. Because Russia cannot burn this surplus gas efficiently, it causes methane leakage into the atmosphere, which is potentially more harmful than carbon dioxide, therefore exacerbating the greenhouse gas effect further.
Assuming that Russia reconstructs all its energy infrastructure from scratch to maintain energy production at today’s level, it is estimated that it would cost above $1 trillion. Nevertheless, had greater attention been paid to energy efficiency, Russia could have saved one third of this amount. Former President Dmitry Medvedev, at the State Council Meeting in 2009, when addressing the vitality of energy efficiency specified that, “losses within the heating supply system can go as high as 60 percent, and in reality, they may be even higher. Electric power lines are absolutely outdated and coupled with the outdated illumination devices, they cause immense energy waste.”
In order to address the problem and improve energy efficiency, the Russian government has taken certain steps by introducing and enacting laws in 2008 titled: “Concerning Measures for Improving Energy and Ecological Efficiency of the Russian Economy,” and in 2009, “Energy Saving and Improving Energy Efficiency.” These measures played a significant role in determining the framework for energy efficiency. However, inadequate implementation, legal difficulties in enforcement and incompetent performances in auditing have been major obstacles in achieving the aim of implementing improved energy efficiency laws.
Extremely high-energy intensity in Russia has directly affected the overall economic competitiveness of Russian companies in the world market. As a result, the direct cost of high level energy intensity, according to the World Bank report estimation, would be equal to as much as 15 percent of Russian companies’ profits. Therefore, raising domestic gas and electricity prices for domestic household consumers has become part of the government policy since 2000. For this reason, tariffs have been increasing since then; however, it is still far below the level of average OECD countries while it is still partially subsidized.