Despite having energy issues that still need to be addressed, Crimea has the potential to become a diversified energy hub if things are done right.

Workers in safety helmets at Nikolayevka solar power station in Crimea. March 3, 2016. Photo: TASS

More than two years have passed since Crimea was incorporated into Russia. Despite a lack of international recognition, several rounds of Crimea-related international sanctions, Ukrainian pledges to retake the “temporarily occupied” areas and a lack of European unity on how to settle the issue, the peninsula’s energy prospects deserve a separate and thorough analysis.

Although Crimea’s gas fields or solar installations were far from being key issues when the people of Crimea overwhelmingly voted in favor of secession and Moscow decided to increase its military forces stationed on the peninsula, they might provide important bargaining chips as the Kremlin attempts to reach international recognition of the new status quo. 

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With steadily increasing gas production, as well as more than 300 MW of solar panels and 87 MW of wind units already built, Crimea might well become a diversified energy producer capable of not only meeting the needs of its population, but also supplying energy beyond its borders. It could develop its renewable sources of energy without even spoiling the touristic appeal of the peninsula.

Although anti-Russian sanctions effectively blocked foreign companies from working there, using target-oriented programs and renewable energy subsidies, Crimean authorities could turn the peninsula into a diversified energy hub.

Energy security for Crimea

Of the many problems Russia found itself confronted with after Crimea’s accession, energy security is one of the most troubling.

Before March 2014, the peninsula imported 85 percent of its electricity needs (approx. 1.1 GW) via four massive power transmission lines from Ukrainian cogeneration and nuclear plants in Zaporizhia, Kryvyi Rih and Kherson.

Although Crimea has solar and wind power units capable of generating 300 MW of power, the peninsula cannot fully rely on intermittent energy sources. That is why Moscow decided to construct an “energy bridge” from the Krasnodar region in Russia via the Kerch Strait to Crimea.

Throughout 2014 and 2015 Ukraine continued its electricity supplies despite Crimea’s secession, while the Crimean utility provider duly paid for it. Nevertheless, the “energy bridge” construction work continued expeditiously to make the transition period as brief as possible.

After Ukrainian saboteurs blew up the power lines to Crimea, November 2015 saw a complete termination of power supply from Ukraine. The constrained energy consumption mechanisms hastily put into operation did not last for too long. Having brought online two threads of the energy bridge in December with a combined capacity of 400 MW, with another 400 MW added in the spring of 2016, Crimea is set to cope with peak-load operation (1.15-1.2 GW) as summertime tourists flock to the peninsula in July and August.

The safest option to guarantee Crimea’s energy security would be to endow it with its own generating capacities, which would not seem that difficult given the peninsula’s abundant renewable resource base. Moscow has allotted 50 billion rubles (about $769 million at current exchange rates) for the purpose of improving Crimea’s energy infrastructure by 2020; however, instead of inundating the peninsula with federal cash, it would be much wiser to create business conditions conducive to a swift local upswing in energy production.

Crimea’s accession solved many energy problems at once, while creating completely new ones. Disagreement over the boundaries between Ukraine and Russia in the eastern Black and Azov Seas dating back to 2003 are now devoid of any meaning, since it would be very difficult to imagine what could prompt the Kremlin, either now or later, to forgo Crimea. Russia also “inherited“ Chornomornaftogaz (CNG), previously a subsidiary of the Ukrainian state company Naftogaz, thus, creating a legal limbo as to what should be done to compensate the Ukrainian side for the total costs incurred in operating CNG.

Breaking Crimea’s cycle of energy underdevelopment

Having nationalized Chornomornaftogaz on Mar. 17, 2014 and transformed it into a state enterprise named Chernomorneftegaz, Crimean authorities can now proceed to tap into the subsoil resources of the Black and Azov Seas.

As a first step, Crimean federal authorities decided to ramp up the current gas production. Indeed, the peninsula’s 2015 output reached an all-time high of 1.84 billion cubic meters (bcm). They certainly had some momentum to take advantage of – the further development of the Shtormovoye and Arkhangelskoye fields, as well as the prospect of new Odesskoye and Bezymyannoye fields coming soon on-stream materialized just before Crimea’s secession.

If all goes well, Crimea might soon cover its own domestic needs (1.9-2 bcm) and grow even further, perhaps even reaching the 3 bcm target set by the CNG management.

The company that used to be the only offshore operator of Ukraine is currently developing nine hydrocarbon fields, of which two are gas condensate fields, six are gas fields and one is a crude oil field. Future development possibilities do not end there, taking into consideration that Chernomorneftegaz holds almost twice as many licenses, including seven more fields containing considerable gas deposits.

The Skifskiy gas field, believed to contain up to 250 bcm of technically recoverable gas, appears to be the most promising of them all. Until 2014, a consortium consisting of ExxonMobil, Royal Dutch Shell, Petrom and Ukrainian state-controlled company Nadra Ukrayny developed it. However, judicial issues might get in the way of developing Crimea’s offshore fields as only state-controlled companies are allowed to exploit Russia’s continental shelf. Therefore, technically only Gazprom and Rosneft are allowed to do so, CNG, being an entity owned by the regional government, is not. This has to be addressed, preferably within the framework of the Subsoil Law of the Russian Federation.

There have been rumors regarding Gazprom’s eventual takeover of Chernomorneftegaz, which might provide an easy way out of this current legal uncertainty. However, numerous arguments point to the inadvisability of such a decision. Firstly, since March 2014 CNG has been placed under U.S. sanctions and is unlikely to see its status changed in the forthcoming future.

Second, Gazprom has a plethora of problems on its own and should not be considered the most effective administrator of gas fields that mostly serve the peninsula’s domestic gas consumption. Thirdly, keeping CNG in Crimean hands might provide a well-needed boost to regional business and serve as a test site for new energy policy initiatives extending beyond current Russian practices.

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Crimea’s gas distribution network also requires improvements. Despite being 15 percent above the national average at 81 percent, Crimea’s gas supply coverage rate needs to be extended even further. This might be facilitated by the construction of an underwater gas pipeline supplying gas from the Caucasus regions of Russia to Crimea that will be built by 2017.

Moreover, not only fields and licenses changed ownership in the last two years – pipeline networks, two gas-fueled Combined Heat and Power (CHP) plants, as well as spare gas injected into underground storage reservoirs became property of the two regions.

Alternative energy sources in Crimea

Crimea used to be Ukraine’s sunniest region, with an average solar potential of 1400-1500 KWh per square meter, roughly the equivalent of southern France’s irradiation. Although Ukraine’s energy policy was in no way quick enough to tackle the development of Crimea’s alternative resources, 2010’s  energy policy marked a great leap forward.

Between 2010 and 2012, Crimea put into operation four solar parks – Perovo, Okhotnikovo, Rodnikovoye and Mityaevo. Moreover, a fifth photovoltaic installation, Nikolaevka, was scheduled for 2015. Crimean authorities should build on the previous administration’s legacy and address the region’s solar energy needs. In just three years, from 2011 to 2014, solar energy managed to carve out an increasingly bigger share in the region’s electricity needs, at times reaching even the 25 percent mark. Since Crimea’s accession, however, the development of alternative energy on the peninsula has discernibly slowed.

Similarly to gas assets, photovoltaic parks were nationalized in March 2014 and brought under regional control. The problem is that during its Ukrainian years, Crimean solar power operators benefited from a €0.446 per kWh “green” feed-in tariff ($0.51 at current exchange rates), which has been lowered tenfold after the peninsula’s accession to Russia. Crimean solar parks were developed and operated by two entities: the Ukrainian government and primarily an Austria-based company named Activ Solar GmbH, allegedly linked to A. Klyuev, who was formerly Ukrainian President Viktor Yanukovych’s Deputy Prime Minister overseeing the energy sector. Activ Solar had assets up to 407 MW on the peninsula, of which 227.5 MW were in operation at the time of Crimea’s accession; the remainder was in early stages of development.

Activ Solar GmbH, however, had €800 million ($909 million) worth of credit debt. Moreover, most of the banks financing Crimea’s solar expansion were Russian – Sberbank, VTB, VEB (Russia’s foreign trade bank) and Ukraine’s Oschadbank. Thus, the solar parks will most likely end up being the abovementioned banks’ property. Given the undesirability of aggravation of sanctions vis-à-vis all those Russian banks, selling these assets to entities not subject to sanctions-related pressure might be a wise path to follow. Moreover, by involving local energy companies, this might represent another appropriate opportunity to invigorate the region’s business climate.

The current Crimean tariff rate does not incentivize renewable energy sectors at all, equating every input source under a united 3.47 rubles ($0.05) per KWh flat charge. This is enough to attain a meager operational profit, yet insufficient to compensate for the funds invested in solar projects. Bringing back the heavily subsidized status quo would be impossible, taking into consideration that Ukraine has made serious headway in eliminating energy subsidies that accounted for almost 10 percent of its GDP. Nevertheless, special government measures are needed in order to avoid missing a tremendous opportunity to kick start Russia’s “green revolution” in a region that saw its first experimental solar park built in 1986.

The prospects of wind energy are equally attractive – Crimea was the first Russian territory to have a pilot wind farm built in 1931 near Balaklava. Although Nazi forces destroyed it during the World War II battle for Sevastopol and the region subsequently did not go on to become a leading wind energy hub, the wind keeps on blowing in-shore. Currently, Crimea has 87 MW worth of wind energy units, which does not bode well for the development of an alternative energy whose regional potential is estimated at 3.7 GW.

Potential wind projects suffer from the elimination of the “green feed-in tariff” and binding local-content requirements stipulated under Russian regulations (25 percent in 2016, to be raised to 65 percent in 2019). The overwhelming majority of wind parks under construction are made from imported materials, including Ukrainian components.

Much remains to be done to fully embrace Crimea’s energy potential. With the peninsula’s electricity supply guaranteed by transmission lines linking it to Russia, Crimea might finally engage in developing its own resource base. In order to free up the potential of Crimean alternative energy, the authorities should create separate regulatory conditions and reestablish a form of “green tariff,” so as to keep alive the incentives of energy investors. If this is done correctly, they might even go as far as to develop Crimea’s geothermal energy, estimated to have a heating supply capacity of 1.4 GW and electric plant capacity of 200 MW.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.