Developing the Legal and Regulatory Framework for Wind Power in Russia

REQUEST FOR GLOBAL ENVIRONMENT FACILITY (GEF) FUNDS
FOR
MEDIUM-SIZED PROJECT (MSP)
PROJECT SUMMARY
PROJECT IDENTIFIERS
1. Project Name: Developing the Legal and Regulatory Framework for Wind Power in Russia.	2. Proposed Implementing/Executing Agency: International Finance Corporation (IFC), a member of the World Bank Group.
3. Country: Russia	4. Eligibility: Russias ratification of the UN Framework Convention on Climate Change (UNFCCC) was accepted on 28 December 1994
5. GEF Focal Area: Climate Change	6. Operational Program: OP 6: Promoting the adoption of wind energy by removing barriers and reducing implementation costs.
7. Project Link to National Priorities, Action Plans and Programs:
The project embodies several of the goals of Russian high priority efforts: (1) It meets environmental goals by initiating a utility-scale wind power project and setting up the methodology and incentives to encourage further wind project development so as to allow replication of the project; (2) It meets the new power sector goals by attracting new investment to the power sector; (3) It sets up an independent power producer in line with the Russian goal of encouraging competition within the power sector. The project has the support of the Federal Energy Commission, of the Ministry of Power and Energy, the Ministry of Natural Resources, the Russian Ministry of Science and Technology, and the local Oblast authorities. 
Russia just recently passed reform legislation for the power industry, which reflects a major economic modernization and overhaul it has been working on for the past three years with assistance from the IFC and World Bank. New legislation allows for the breakup and restructuring of the nations electricity network, the worlds largest power grid. The existing monopoly structure, Unified Energy System (UES) will be unbundled and Russias electricity sector will be reorganized into groups of power producers, distributors and sales units. Russias goal is to encourage the development of independent power producers and distributors, while at the same time move the sector towards market pricing. A key factor in the successful implementation will be the ability to attract investment needed to upgrade the decaying, inefficient and polluting Soviet-era power system. In line with this major overhaul, the government is interested in developing utility-scale clean energy projects, which embodies a commitment to the Kyoto environmental agreements. With support from the European Bank for Reconstruction and Development (EBRD) Russia has established, through UES, an Energy Carbon Facility.
As part of both its environmental thrust and restructuring of the power industry, the Russian government has been studying how to encourage development of renewable energy. In May of 2001, Russia announced preparation of a Federal decree containing provisions to stimulate the development of renewable energy, particularly wind energy. The Russian Ministry of Power and Energy has initiated several small-scale demonstration programs. However, the Ministry recognizes that removing barriers and establishing the needed regulatory environment can best be done by demonstrating the value of a utility scale independent wind power plant. The Ministry has expressed strong endorsement of the proposed Leningrad Wind Power Plant and has promised to provide the needed support and licenses necessary for establishing both the first utility scale power plant and the overall regulatory methodology with a framework to encourage wind power development and project financing sponsored by GE Capital.
The Russian Federal Energy Commission has in meetings and in a follow-up letter by the Federal Energy commissioner, to the Feasibility Study team for the project, expressed the Commissions strong support for the project. The Commissioner and his colleagues expressed their commitment to help establish a utility-scale wind power plant to give impetus to the development of a wind power industry in Russia. The Commissions promised support is to explicitly develop a mechanism allowing the wind power to be sold into the Russian Wholesale Power Market (FOREM) under a long-term Power Purchase Agreement.
The proposed project is located in Leningrad Oblast, a region with a growing need for new power sources, and has the strong endorsement and support of the Leningrad Oblast government and the Leningrad Regional Power Commission. The Leningrad Oblast has embraced the proposed plant and has made two major commitments to supporting what the Governor has called a noble project. The Oblast will provide profit and project tax holidays to the plant for the debt period plus two years. Of even greater significance for the project and for the development of the wind industry in Russia, the Oblast government has committed to introducing legislation to provide a wind tax credit for industrial users in the Oblast. This credit would eliminate the gap between the price for wind power and the conventional power tariffs.

8. Status of GEF National Operational Focal Point Review:
The GEF Focal Point in Russia, Mr. Sergey Tveritinov, has reviewed the MSP. He requested and received a letter of endorsement from the Leningrad Oblast Vice Governor Grigoriev. The GEF Focal Point endorsement is attached.

9. Project Rationale and Objectives: 
Russia is reforming its energy sector and opening it to independent power production. However, to date there are no Independent Power Producers (IPPs) offering wind power on a multi-megawatt, utility scale. 
Private investors are ready to invest in a 75 MW on-shore wind power project in the Leningrad Oblast, provided a suitable legal and regulatory framework can be established. A feasibility study has already been prepared, and potential off takers have been identified. The feasibility study confirmed the practicality of the project but shows that further financial incentives would be required to make the plant economically viable. The proposal is for the Oblast to support wind power through a tax credit.
The MSP will focus on the Leningrad pilot 75 MW grid-connected wind power plant. The objective of the proposed work would be to develop a framework for wind power in Russia as a model for the rest of the country. The work will create the legal and regulator models and examples that will help wind power to become a major resource for Russia. Indicators:
Increased awareness of wind energy and its potential for utility-scale grid connected electric power production.
Establish a legal and regulatory framework for utility scale wind power plant project approval and operation.
Determine the model framework for using wind plants in grid-connected applications throughout Russia for electric power production.

10. Expected Outcomes:
The GEF supported work would have the following outcomes:
A model long-term power purchase agreement between industrial customers, such as Lukoil and Transneft and the wind power company, 
A model grid connection and grid access and priority agreement between the Oblast Energy Commission and the wind power company, 
Draft Oblast legislation for an industrial users tax credit for wind power 
An approved methodology for setting the tariff for electricity from a wind power plant, 
A model long-term power purchase agreement for selling power to the Russian wholesale market (FOREM) which has the ability to remain valid under changes in the Russian wholesale market structure, 
A model land lease/purchase/royalty payment agreement for the wind power plant with appropriate concessions from the Regional Administration, 
A clearly delineated and sequential model ordering of the approval process on the Oblast level from design to commissioning, and 
A model for obtaining licenses from the oblast and federal levels for wind power companies. 
A model for conducting environmental assessments for obtaining environmental approval for wind power plants. 
Collectively these activities represent a major capacity building effort for wind power in Russia.	Indicators:
Model Power Purchase Agreement with support of all relevant parties
Model grid access agreement with support of all relevant parties.
Draft legislation and supporting rationale acceptable to the Oblast administration.
Approved wind power tariff methodology.
Model FOREM Power Purchase Agreement with support of all relevant parties.
Model Land Use Agreement with support of all relevant parties.
Defined documented wind power plant project approval process.
Defined and documented wind power plant licensing process.
Model environmental assessment and defined and documented approval process for a wind power plant project.

11. Planned Activities To Achieve Outcomes
Power sector model agreements on the Oblast level including power purchase agreements, tariffs and grid connection and operation agreements ($190,000 from GEF);