Russian companies consume on average a significantly higher amount of energy per unit of production as compared to their Western peers. High ‘energy intensity’ can pose a threat to growth prospects of Russian companies, especially in light of the rapidly rising energy prices (which have historically been well below the world prices and which are now set to become liberalized by 2011 in Russia). Timely investments into energy efficiency will prevent energy costs from eating into companies’ profit margins and will help companies maintain their competitive edge.

Energy efficiency investments are also becoming increasingly profitable as energy prices continue to increase. For example, a recent energy audit conducted by the EBRD at one of its industrial clients helped to identify a mix of energy efficiency improvements with total investment cost of €50 million. These investments, if implemented, could reduce the company’s energy bill by nearly 30 per cent, with payback of individual projects (primarily from the achieved cost savings) ranging from one to four years.

Finally, high energy consumption and inefficiency may become a bottleneck for future capacity and production growth, as companies are faced with high charges for new power grid connections and tight limits on energy consumption.

How much more competitive could energy savings make a company?

Let’s assume a company with energy representing 20 per cent of total production costs, which can be typical for many of the energy intensive sectors. Cutting its energy consumption by 25 per cent (which some EBRD clients were able to achieve) through investments into more efficient energy and process equipment will allow the company to reduce its total production cost by 5 per cent. Such a reduction can significantly improve the company’s profitability or competitive power. More importantly the risks of these investments are low and returns easily predicted, in contrast to many other types of investments. It is also important to note that investments into efficient equipment and processes often bring other positive “side effects,” such as improved product quality or increased productivity.

Could it make Russian companies more competitive and attractive to investors?

Leading companies around the globe become increasingly aware of the need for environmental protection, rational energy use and climate change. They respond to these challenges by raising environmental standards in order to minimise the negative impacts of their economic activity on the environment. An increasing number of companies participate in voluntary carbon emissions trading schemes to offset the ‘carbon footprint’ of their business.

Russia becomes increasingly integrated into the world economy, with Russian companies increasing their exports and acquiring assets abroad, creating JVs with foreign sponsors and listing stocks on foreign stock exchanges. Having ambitions to become global players, Russian companies need to adhere not only to high international standards for corporate governance or transparency, but also high environmental and social responsibility standards. Poor energy utilisation practices, such as coal mine methane venting or associated gas flaring can poise substantial environmental, reputational and technical risks for investors. The attention to the issues of energy efficiency and rational energy use will certainly be an essential value driver going forward.

How energy efficient are Russian companies at the moment? If they aren't efficient, what problems does this cause?

Most of the inefficiencies prevailing in the Russian industry were ‘inherited’ from the Soviet times, when energy was cheap and plants were designed with little consideration given to rational energy use. Moreover, this inefficient equipment is still in use: out of 100 industrial companies surveyed by the EBRD in 2007, 32 per cent used equipment installed more than 20 years ago. This explains why most Russian companies are far below international benchmarks for energy consumption levels.

High-energy intensity and inefficiency reverberates negatively through the whole Russian economy:

• Energy demand is outstripping supply, thereby constraining further economic growth.
• The lack of energy efficiency also presents a threat to Russia’s energy security i.e. the ability to meet export obligations while satisfying the growing domestic demand for energy.
• Such energy deficit creates a need for costly investments in additional energy generation capacities and infrastructure upgrades.
• ‘Wasting’ energy domestically minimises the amount of energy resources available for exports at world prices.

All of the above problems can be addressed as Russia is believed to be able to save 35-40 per cent of its current annual energy consumption through enhanced efficiency.

Are firms reluctant to become energy efficient? If so, why?

It is not proper to say that Russian companies are reluctant to become energy efficient. Over 70 per cent of companies surveyed by the EBRD plan capital investments in process plant modernisation, which will naturally lead to improved energy efficiency. However, most of them overlook the vast potential for further efficiency improvement or do not prioritise additional investments that can be made to lower energy consumption. This relates, for instance, to the upgrading of energy infrastructure and auxiliary equipment (compressors, boilers, etc.).

This happens because: companies in the growth phase tend to focus on production expansion and market share growth, as opposed to cost cutting and energy saving; and financial resources are limited while external borrowing for energy efficiency projects is not widespread. For this reason investments into energy efficiency are usually not a priority; Historically, energy in Russia was abundant and cheap and little attention was given to rational energy use. This culture prevails and most companies have not put in place policies and organizational structures to systematically address energy efficiency (whereby technical departments are often times focused on operations, maintenance and ad-hoc improvements). Some 80 per cent of companies surveyed by the EBRD have rated themselves very low in terms of their energy management practice and capacity, which means that many energy saving opportunities are simply not being looked at and evaluated.

What role does the EBRD have in making firms more energy efficient?

Energy efficiency is a key priority for the EBRD in all countries of operations. The EBRD works with large energy users across all sectors in Russia to promote best practice and encourage companies to implement energy efficiency investments. Our role is to help bridge the gap that exists between technical expertise and financial decision making. To achieve this, EBRD combines financing with free technical support such as energy audits to provide companies with an objective assessment of energy saving opportunities, identify and select viable energy efficiency projects. We then discuss the benefits of implementing these projects with the top management, thereby raising priority of projects which might otherwise not be implemented. EBRD then suggests including the selected projects in the broader investment programme which the Bank considers financing. EBRD also encourages energy conservation by promoting energy management systems and training.

EBRD strives to build a case for energy efficiency and develop projects with a strong demonstration effect on the business community. One such example is providing a €600 million loan (the first portion of which was signed in 2007) to the Russian steelmaker Severstal to support what was dubbed the largest energy efficiency investment programme ever undertaken by an industrial company. This transaction is expected to send a strong signal to the business community that energy efficiency is a crucial issue CEOs should focus on and that these investments are commercially viable.

The EBRD also develops dedicated financing facilities with local partner banks to promote energy efficiency in small and medium-sized enterprises (SMEs). This approach was piloted by the EBRD in Russia in 2007 when a US$ 10 million credit line enabled “Center-invest,” a Russian bank based in the southern city of Rostov-on-Don to offer loans for small-scale energy efficiency projects. Those loans were complemented with free technical assistance to companies to support project development.

All this work is core to the EBRD’s Sustainable Energy Initiative (SEI), launched in May 2006 and aimed at doubling investments into sustainable energy to €1.5 billion from 2006-08. In Russia, the EBRD has provided cumulative financing of €594 million for energy efficiency projects since the launch of this Initiative, with a total project size of €2,38 billion.

What effect could efficiency improvements have on the environment? Would this improve the image of Russian companies?

Energy efficiency contributes to a more rational use of diminishing energy resources. Energy efficiency also results in reduced emissions of greenhouse gases – which are widely believed to be among the main causes of climate change and global warming.

Energy saving is hence a vital part of being a ‘socially responsible’ company, which entails minimising the negative impacts of economic growth on the environment and responding to the global challenges of diminishing energy resources as well as the climate change. Increased attention to the issues of energy efficiency will certainly improve the image of Russian companies as environmentally conscious and socially responsible ‘corporate citizens.’ However, these challenges still need to get a wider recognition as climate change, for instance, is not placed very high on Russia’s corporate agenda.

This feature by Pavel Teremetsky, Business Development Manager for Energy Efficiency at the EBRD first appeared in the Moscow News on 12 September 2008.