1. Igor Bashmakov Russian GDP Doubling, District Heating and Climate Change Mitigation UNFCCC Workshop Climate Change Mitigation: Vulnerability and Risk, Sustainable Development, Opportunities and Solutions June 19, 2004, Bonn, Germany June 19, 2004, Bonn, Germany High energy intensity

2. Does Russia sells its economic growth for Kyoto or does Kyoto opens a window of opportunity for Russian economic growth? The evaluation of potential impact of Kyoto protocol ratification on Russian economic growth requires answering the following 7 questions: 1. What are possible levels of energy production and what portion of Oil and Gas revenues are needed to keep those levels? 2. How much oil and gas revenues (own investments deducted) are needed for Russia to buy the doubling GDP? 3. How much energy would then be available for domestic use? 4. What GDP doubling means for two sectors: Oil-Gas sector and Non- Oil-Gas sector? 5. Can Russia support the required growth of Non-Oil-Gas GDP with sufficient energy services when energy export to finance growth is deducted ? 6. How far Russia can go with the energy efficiency revolution? 7. What are sustainable economic growth rates for Russia before 2012 and how much GHG emissions sustainable growth generates?

3. If Russia doubles GDP with present high energy intensity the capacity to export oil and gas expires in 2010! Russia needs energy export revenues to “pull” its NOGGDP growth, so aggressive energy policy is vital! To keep 2002 oil and gas export levels, while doubling GDP, Russia needs to sustain annual energy productivity growth by 4,8%! If Russia is only able to keep rates of energy productivy improvements achieved in 2000- 2003 (2,3%), then achievable GDP growth in 2002-2010 is in the range of 50-70%.

4. Law of energy efficiency: the sustainable way to economic prosperity goes along the energy efficiency arch! Central planning makes every economy irrespective of climate and size pregnant with large energy inefficiencies! Transition back to a market economy allows decoupling of economic growth and energy consumption. Poland managed to increase its GDP by 45% in 1990-2001 with the decline of TPES by 9,3%! Russia reduced GDP energy intensity by 2,3% annually in 2000-2003!

5. Russian District Heating Is regularly ignored when Russian energy and GHG mitigation policies are discussed and determined, but Is regularly ignored when Russian energy and GHG mitigation policies are discussed and determined, but Accounts for about 45% of all domestic energy consumption, and for over 50% of fossil fuel use and Accounts for about 45% of all domestic energy consumption, and for over 50% of fossil fuel use and Is the largest single product market in Russia split into over 50000 local markets with: Is the largest single product market in Russia split into over 50000 local markets with: –30 US$ billion annual sales, and –50 US$ billion efficiency improvement investments potential, but with only 500 US$ million annual investments (100 year to release the potential); –at least 20% nation wide fossil fuel consumption and GHG emission reduction potential; Over 50% of district heat is consumed by buildings; Over 50% of district heat is consumed by buildings; Industrial consumption went down by 35% in 1995-2001; Industrial consumption went down by 35% in 1995-2001; The future for large CHPs in Russia is not bright. Market for large CHPs is squeezed by the competition vise; The future for large CHPs in Russia is not bright. Market for large CHPs is squeezed by the competition vise; With the shortage of metering heat in Russia is still traded in the mystery of heat quantities and costs. With the shortage of metering heat in Russia is still traded in the mystery of heat quantities and costs. Large business recently moved into heat market. Large business recently moved into heat market.

6. Russian District Heating Indicators IndicatorUnits Volume Volume Combined heat and power plants Units485 Including RAO EES Rossi CHPs Including RAO EES Rossi CHPsUnits242 Large boilers Units>190000 Indiv. heat generators and boilers Units>600,000 Heat generation Million Gcal 2,300 Own use Million Gcal 74 Network losses Million Gcal 442 Heat networks 1000 km 183.3 Final heat consumption Million Gcal 1,784 Average fuel efficiency %71.5 Total en. inputs to heat generation Million toe 323 Heat tariffs, average $/Gcal14 Heat tariffs, range $/Gcal8-300 Heat sales $ billion 30.0 Potential savings from efficiency improvements $ billion 10.0

7. Russian large CHPs heat in a competition vice CHPs supply 30% of district heat: Wrong system designs and blind tariff policy makes decentralization attractive; Industry built own large and small CHPs and boilers; Consumers started heat metering and consumption reduction; CHP generation declined by 35% in 1990-2001; Sales reduction escalates costs and pushes more clients to decentralization; Public utility CHPs design capacities are loaded only at 40-45%.

8. Heat losses in the 190 Russian DHSs as a function heat load rarefaction High heat supply centralization efficiency zone Marginal heat supply centralization efficiency zone Effect of low heat supply networks maintenance quality

9. Some Russian DHS efficiency indicators Average efficiency for all heat sources – 71,5%; Average efficiency for all heat sources – 71,5%; Heat only boilers: Heat only boilers: –for 64% municipal boilers efficiency is below 80%, –for 27% - below 60%, –and for 13 % - even below 40% Heat supply networks: average heat losses are in the range 20-25%: Heat supply networks: average heat losses are in the range 20-25%: –Actual losses in 70% of heat supply systems are in the range of 20-70%; –Due to excessive centralization in 75% of DHSs costs to transport heat accounts for about 50% of total DHS costs; –Low replacement rates lead to critically low level of heat networks physical reliability and high frequency of failures – 0.6-4 accidents/km/year; –High leakages ratio, lack and low quality of insulation, failure to provide required hydraulic regimes and temperature schedule. Buildings are as a rule either overheated or under-heated and consume 20-50% as much heat and hot water as potentially needed; Buildings are as a rule either overheated or under-heated and consume 20-50% as much heat and hot water as potentially needed; New building build on the basis of new Building codes are twice as heat efficient as existing ones, to modernize which a lot efforts and investments are required. New building build on the basis of new Building codes are twice as heat efficient as existing ones, to modernize which a lot efforts and investments are required.

10. Regional EE Building Codes development and enforcement system timetable (Russia): 10 years to develop and 10 more years to get effects

11. Private Russian business is moving to DHS: with limits of purchasing power they have to reduce costs and improve efficiency to pay back investments Threshold 2: rigidity of collecting payments actions brings no results Threshold 1: collection rate starts declining Bashmakov’s wing

12. Doubling Russian GDP and GHG Emission Mitigation Policy Synergy. Major conclusions Kyoto commitment is just half way on the road to GDP doubling; Kyoto commitment is just half way on the road to GDP doubling; –To reach Kyoto targets Russia needs an effective energy efficiency policy; –To double GDP to the year 2010, Russia needs revolutionary energy efficiency policy! Absence of clearly stated federal energy efficiency policy and institutions limits the energy productivity growth and so limits the potential economic growth; Absence of clearly stated federal energy efficiency policy and institutions limits the energy productivity growth and so limits the potential economic growth; Addressing this problems trough Kyoto is equivalent to setting for Russia country-wide energy efficiency improvement target which should correspond to desired rates of economic growth; Addressing this problems trough Kyoto is equivalent to setting for Russia country-wide energy efficiency improvement target which should correspond to desired rates of economic growth; So ratifying Kyoto for Russia means: So ratifying Kyoto for Russia means: –a stamp on the decision to pull country out of the energy inefficiency swamp to the sun of economic growth; –open window of opportunities: gives push to use major Russian undeveloped energy resource – energy efficiency improvements.