No. 3, 2012


Oil of Russia magazine talks to Maxim Karnaukhov, Deputy General Director of LUKOIL-Ecoenergo

A SPECIAL COMPANY, LUKOIL-ECOENERGO, was created by the LUKOIL Group for the development of renewable energy. In the business sector "Power Generation" it is the youngest and fastest growing subsidiary of the Company. LUKOIL-Ecoenergo has hydro assets in Russia, and is engaged in projects in the field of wind and solar energy abroad. The company plans in the foreseeable future to apply its international experience in the field of "green" energy in Russia.

Q: Presently the key assets of LUKOIL-Ecoenergo are pooled in the hydropower industry. What do you think about the current state of the Russian hydropower industry and its development perspectives?

A: The fact is that many Russian hydropower facilities were built in 1950s‒1960s and bulk of their equipment is worn out and obsolete. The technological standards have been raised dramatically since then. Modern equipment is by far advanced and efficient. Consequently, a hydropower plant upgrade requires large investments.

The hydropower facilities of LUKOIL-Ecoenergo are no exception and their upgrade would also take a lot of time and effort. And such extensive efforts are already underway at the hydropower plants of our Company.

However, with the current wholesale tariffs for electric power you can hardly expect quick and high return on such investments. In the meantime the government dropped some hints that certain steps would be taken to encourage the power generating companies to take steps in this direction. The legislative intentions were clearly announced but no actual mechanisms have been put in place yet in either federal laws or the related regulations. We expect a positive decision from the government by the end of this year or during the year to come.

Obviously, we are not alone - other companies are looking forward to having a new law as well. As opposed to LUKOIL, many of them, like RusHydro and Nord Hydro, make all their money by generating power, so the changes in the legislation are critical to the entire industry.

Q: What is the current position of LUKOIL-Ecoenergo at the energy markets of southern Russia?

A: LUKOIL-Ecoenergo has four hydropower plants: Tsimlyanskaya HPP, which has a capacity of 209 MW - a true diamond in our crown (Rostov Region), its capacity is to be increased up to 211.5 MW in the near future; Belorechenskaya HPP (48 MW) and Krasnopolyanskaya HPP (30.4 MW) in the Krasnodar Territory; Maykopskaya HPP (9.44 MW) in the Republic of Adygeya.

The aggregated capacity of our hydropower plants is approximately 300 MW, which is about 5% of the installed capacity of all hydropower plants in southern Russia. It may appear insignificant but our hydropower plants have been playing an important role in supplying power to the southern regions of Russia. Belorechenskaya HPP, for one, is the biggest hydropower plant in the Krasnodar Territory, while Maykopskaya HPP is the biggest power plant in Adygeya.

Q: What do you think about the prospects for the development of small hydropower plants in our country? Is LUKOIL-Ecoenergo interested in the construction of such power plants in Russian and abroad?

A: I have no doubts whatsoever that the construction of the small hydropower plants is the only way to boost the development of the hydropower industry in Russia. It is no secret that back in the Soviet times when the economy was centrally planned the government used to spare no expense to implement the gigantic projects breaking all records in process. Sayno-Shushenskaya hydropower plant and other projects of huge proportions could not be possibly implemented in any other country but USSR, where the government had unlimited access to the resources.

A lot of large hydropower plants were built during the Soviet times. It is pretty clear right now that the large rivers cannot possibly withstand any more hydropower plants in addition to those already built. However, the opportunities are still good for the development of small power generation units. By the way, in Europe falling onto the "small power generation units" category are all facilities with the capacity below 10 MW, while in Russia the threshold is higher (25 MW) although it is more like medium size - a 25-MW hydropower plant is a rather big facility sitting on a rather big river.

Small hydropower plants (5‒10 MW) is the only way to move forward with the hydropower energy development in the world because the large hydropower facilities have already been built wherever possible. Small hydropower plants are less costly to build and more environmentally friendly in many aspects. And, after all, small HPPs are less dependent on a human factor. Such facilities are normally remotely operated via Internet. It means that the small HPPs are safer. There are a lot of companies offering HPP maintenance services on the market so the small hydropower plants would require just a few people to service them.

Lately we have been in receipt of many offers regarding the construction of the small HPPs with the capacity of 1.5 - 3 MW, especially in Eastern Europe. The fact is that the facilities with capacity exceeding 5 MW create more problems in terms of licensing in, for instance, Bulgaria. We do not discard such offers but our current priority is to gain experience with wind energy projects.

Q: Does LUKOIL-Ecoenergo plan to tap the wind energy in Russia?

A: We have already set the wind energy as our business priority in Russia. Over the past six months our company has been monitoring the wind speed and intensity in the Kaliningrad Region. It normally takes a year to obtain an accurate and reliable data. As such, at the end of 2012 we will review the results and approach the Kaliningrad Region authorities seeking support for a wind power plant project.

This project would not only help promote the alternative power sources - it may become the first major wind energy project in Russia. There is already a 5-plus megawatt Kulikovskaya wind power plant in the Kaliningrad Region. It was built at late 1990s - early 2000s. However, this plant has the second hand equipment from Denmark, which - let us be honest - is well-worn and out-of-date. Modern wind power plants are by far more efficient. Our project may give the wind energy in this region another chance.

Company is determined to implement this project. The Kaliningrad Region is known for strong winds and the information collected over six months of the monitoring cemented our intentions.

Any company operating in the green energy sector is largely dependent upon the tariff for the electric power it generates. If we manage to come to an agreement with the local authorities on a special tariff for this facility we will be able to launch the construction of the wind power plant in the beginning of the next year and have it completed by the end of 2014. If this is not the case we will wait till the federal government make their move and put a mechanism in place to support the renewable energy.

Sooner or later our country will realize that its power generation sector needs to be diversified in favor of the alternative sources of energy. By that time we will have the necessary expertise and personnel to implement the major green energy projects in Russia.

Q: What goals does the LUKOIL-Ecoenergo seek to accomplish at the foreign markets?

A: In 2011, we established LUKERG JV with our Italian partner ERG Renew and determined the scope of our joint work. In the near future we will focus on Eastern Europe where LUKOIL's presence is quite notable. Our primary area of interest includes Bulgaria, Romania and Ukraine.

The fact is that LUKOIL has well-established positions in the Balkan countries, which offer a good opportunity for synergy with other Company assets. On one hand, the alternative energy projects would help LUKOIL to strengthen its environmental image in these countries, while on the other hand, the local LUKOIL's subsidiaries can, if necessary, support LUKOIL-Ecoenergo activities via, for instance, providing accounting or legal support services.

Our interests on the foreign markets lay primarily in the area of wind and solar energy. LUKERG has already made an important purchase. We are currently waiting to close a transaction involving purchase of 100% interest in the wind power plant in the vicinity of Dobrich (Bulgaria) from Raiffeisen Energy & Environment. The plant's capacity is 40 MW, which is approximately 10% of the Bulgarian wind energy market. We have also made the first important step in the solar energy by commissioning a 1.25 MW solar power plant at Burgas refinery in Bulgaria.

In the near future we may make one more purchase or build a new wind power plant, which would be quite logical in light of the potential synergy with other Company's subsidiaries. The LUKOIL Energogaz specialists gained an invaluable experience participating in the commissioning and maintenance of the solar power plant in Bulgaria and now they can be very helpful in implementing the similar projects.

Of critical importance for us is the approach being taken by these countries towards investments in "green energy". Ukraine, for one, has a favorable legislation on the solar energy. Thanks to an unprecedented preferential tariff for the electricity generated by solar power plants the solar energy sector in this country has been rapidly growing. Last year they built one of the biggest solar power plants in Europe.

We also consider participating in several small construction projects - up to 5 MW - to gain the firsthand experience in implementation of such project in Ukraine. In the slightly longer run we would probably look into the wind energy business in this region, where the tariffs are quite acceptable.

Q: Is it LUKOIL-Ecoenergo intention to replicate the experience of building solar power plants similar to that at the LUKOIL's refinery in Burgas?

A: In Bulgaria the management of LUKOIL Neftokhim Burgas set aside two land plots for our potential new solar power plant projects. One of them is ideally suited for the construction of a new 4.5 MW solar power plant.

If you have a land plot that is not assigned for some other project and cannot be possibly sold due to its location, it would appear quite logical to use it for a solar power plant construction. For instance, the land plot on which the solar power plant currently sits used to be leased out but the lease was not as economically beneficial as the solar power plant, which adds real value to the plot. Let's say you have a land plot, which "burns" your money instead of generating profit - if you manage to break even on its maintenance cost and make some profit you can call yourself cost-efficient.

Since the beginning of our solar power plant construction at the Burgas refinery the price of the solar batteries dropped by 30%, but the tariff for the photoelectricity also decreased. Nevertheless, the tariff remains economically attractive - for solar energy it is five times higher than that for the grid electricity.

In addition to generating profit such projects are obviously beneficial for the Company's image in the regions where it operates. As a matter of fact such outstanding environmentally friendly projects get much more publicity than the regular and very efficient but much less conspicuous steps taken by the Company to ensure environmental and operational safety at its facilities.

Our experience with the construction of 1 MW power plants can be replicated in the construction of bigger plants (5, 10 or 50 MW). It all boils down to the investments, payback period and contractor's ability to build such facilities. The current aggregated capacity of all solar power plants in Bulgaria is approximately 25 MW, which, of course, looks pretty pale in comparison with 10 GW generated by the solar power plants in Germany. But I am convinced that the solar energy has a big future in Bulgaria and other countries.

Q: Some LUKOIL subsidiaries' gasoline filling stations in Russia and Serbia use solar, wind and geothermal energy to satisfy their own power requirements. Does LUKOIL-Ecoenergo intend to promote using alternative power sources at the Company's gasoline filling stations?

A: We intend to promote using the small alternative power sources at the gasoline filling stations in Bulgaria, but, unlike the pilot projects in Serbia and Russian, we are going to sell the solar electricity.

Our concept is to install the solar batteries on the gasoline filling station roofs. We are currently devising the power sales mechanism and developing standard design because we cannot afford paying for an individual design for each gasoline filling station. A pilot project is scheduled for implementation in 2012 and after that we plan to replicate it at other gasoline filling stations. To do that we would need to figure out how to have all solar panels oriented to the south because the layout and location of the gasoline filling stations are quite different.

If the pilot solar power plant projects live up to our expectations we will then be able to replicate them at the gasoline filling stations in other countries.

Q: LUKOIL is involved in many upstream projects in hot weather countries. What do you think about LUKOIL-Ecoenergo participating in the solar energy projects in such countries?

 A: Indeed, we are first of all looking at the counties with the massive LUKOIL presence (where Company has refineries, energy assets and production facilities).

In this regard Uzbekistan is of particular interest for LUKOIL-Ecoenergo. We plan to launch a small pilot project of a solar power plant construction at one of the Company's facilities in Uzbekistan. Initially we developed a feasibility study for a larger project, made a presentation, and approached the Government of Uzbekistan seeking their approval. Unfortunately, Uzbekistan still does not have a preferential tariff for the alternatively generated electricity and our proposal received no support. However, this country clearly has an enormous potential for solar energy and we have no doubts that the government will soon change their mind about "clean energy".

Our first step would be to build a solar power plant at one of the Company's oil fields in Uzbekistan to accommodate their own needs. It would help us get a firsthand experience in implementing of such project in this country. Once we have some practical results and operational data we would be able to come up to the Uzbek party with more detailed and justified proposal.

As an alternative we considered building a concentrating solar collector which transforms thermal energy of heat carrier by means of a system of lenses and mirrors. In Russia such projects have no future even in the southern regions of the country due to insufficient level of the solar radiation. For hot weather countries this line of business is very attractive although a conventional photovoltaic design is twice as cheap.

At this point of time we decided to confine our operations in Uzbekistan to the photovoltaic plants because they are more reliable and easier to operate. This technology is also cheaper. However, we are not going to abandon the concentrated solar thermal energy option. We will return to this subject in the future especially in light of the growing LUKOIL's presence in Middle East and Africa. We are determined to bring this up with the LUKOIL Overseas management.          - Vladimir Akramovsky

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