Modernizing the Russian District Heating Sector: Financing Energy Efficiency and Renewable Energy Investments under the New Federal Heat Law

Following the liberalization and privatization of the electricity market, Russia is now reforming the heating sector. Similarly to the electricity market restructuring, the trigger for the heat reform is the necessity to attract investments in the modernization of this sector. The existing infrastructure in Russia is obsolete and thus highly energy and carbon (CO2) intensive. The modernization program presents important opportunities to generate energy savings, reduce greenhouse gas emissions, improve local air quality and promote the use of renewable energy sources (e.g. biomass and geothermal energy). Improving the energy efficiency of the Russian heating sector is indispensable to avoid offsetting international climate change mitigation efforts with unreasonably large energy waste in Russia. Realizing energy savings in the Russian heating sector – one of the largest consumers of natural gas in Russia – would also free natural gas for export and thus improve international energy security. The present paper analyzes the extent to which the Federal Heat Law of July 27, 2010 – the legislative pillar of the reform – creates a viable environment for energy efficiency and renewable energy investments in the Russian heating sector. From an investor’s perspective, this paper questions whether the new tariff structure of this law can ensure adequate return on energy efficient investment and thus stimulate the necessary modernization of heat supply. Based on Russia’s long experience with district heating, the paper draws lessons that are relevant for other states (e.g. in the European Union and the United States) that advocate district heating as a solution to decarbonizing heat and electricity supply.