Russia is part of Europe. Moscow is 1557 miles from London, but 4700 miles from New York. The Russian capital is also just 760 miles from Stockholm, as the crow flies. These figures are worth considering when trying understanding the often fraught energy diplomacy between Russia and the European Union (EU). Both sides might sometimes behave otherwise, but they are neighbours, and they live on the same continent. This being so, the big question for the electricity industry is – can this proximity be used to create an effective functional energy trading system, with power being traded between the EU and Russia, just as it does between EU member states themselves?

Since 2003, experts from the two power sectors’ transmission operators, the UCTE (Union for the Co-ordination of Transmission of Electricity) for the EU, and the IPS/UPS Electric Power Council on the Russian side, have been carrying out a feasibility study about interconnection between the two power systems. In this regard, it is worth remembering of course that until 1990, three current member states – Estonia, Latvia and Lithuania, were in the same country as Russia – as part of the USSR, and so there is a high degree of compatibility regarding their electricity distribution systems. And indeed, electricity is already traded between Russia and the Baltic States, (plus near neighbour Finland), with about 14 TWh being exchanged annually. The feasibility study is expected to be completed by summer 2008, and should, said EU energy Commissioner Andris Piebalgs (a Latvian) “Deliver a holistic view of requirements and steps needed for interconnection”. He added: “So far, the preliminary results of the feasibility study have not shown any technical barriers to the potential synchronous work of the 2 power systems.”

The European electricity industry itself broadly accepts this but points out that technical factors are only part of the problem. “It is a big challenge to put the two grids together. They are constructed in different ways. From our perspective, one could say that while there are certainly technical difficulties in uniting the grids it is probably realistic to accept that these will be solved. Unfortunately that’s not where it ends,” said Mr Juho Lipponen, head of unit, energy policy and networks, at the European electricity industry association Eurelectric.

Mr Lipponen said other issues included decision-making procedures. “Who will actually decide to put the grid together and who will invest and what kind of players are needed in that process?” he asked. There was also the question of what kind of market rules would be used on both sides. “From Eurelectric’s perspective we need a technical solution but even then there remain a lot of other questions before we can proceed,” he told Modern Power Systems. For instance does Russia actually have power to spare?

“It might be seasonal – they might have more to spare in the summer – but my overall understanding is that without substantial investment in new generation capacity, Russia will not have a huge amount left to export in the future,” he said.

Another technical problem is the unhelpful fact that the greater the distance electricity is transported, the more power leaches away. “Electricity is by nature a regional or national business, not a global commodity and you cannot transport it over thousands of kilometres like oil or gas,” Mr Lipponen said. This was the general pattern, though in some situations a high voltage direct current (HVDC) link could be used to make it go further, he stressed.

For the Russia-EU interconnection however “we’re talking about a few hundred kilometres only” such as the present transportation of energy from Russia to Finland. That would bypass the power loss problem though it presupposes that transportation may have to be made through countries relatively close to the Russian border such as Finland, Ukraine and the Baltic States, rather than directly to the mainstream EU energy markets. This could raise the prospect of potentially awkward negotiations with the border countries, especially those that are not EU member states such as Belarus and the Ukraine.

But there seem to be no legal obstacles in the way of interconnection with Russia in general. “There is trade for example between Russia and Finland and if both countries have agreed the arrangements for this then there are no impediments to trade,” Mr Lipponen said. He said that in theory the legal aspects could be in place already “but then of course there is another discussion, more a political discussion, of whether both sides employ a similar kind of environmental technology or whether one side can get an advantage,” he said.

Political situation
Regardless of the technical issues, there is a range of political problems that would also need to be overcome for a fully-fledged system of energy trading to exist between the EU and Russia. Relations between Moscow and Brussels have been tepid for some time now, and a series of summits have failed to move both sides very far towards agreeing a comprehensive energy relations agreement.

The most recent, in Mafra, Portugal, during October, failed to make progress on the demands from the European Commission for reciprocal liberalisation in Russian energy markets, should the EU allow Russian companies – notably Gazprom – a free hand in member states gas sectors. However, the two sides agreed a new ‘early-warning mechanism’ funneling improved information between Brussels and Moscow on looming potential energy supply and demand problems. Also, minutes from a preparatory meeting showed both sides have agreed to assess “possible barriers to energy trade between the EU and Russia”, be they “political, legal, economic, financial or technical…” Commissioner Andris Piebalgs and Russia energy minister Victor Krishtenko – meeting in Brussels – have also agreed to create an “expert group to discuss the reciprocity clause”. So there is hope and some encouragement – but not much.

There are also some positive signs on the investment front, with the ongoing liberalisation of the Russian power sector attracting important investments from such companies as E.On, ENEL and Fortum. This liberalisation is due to culminate in the dissolution of Russia’s giant quasi-monopoly RAO UES [United Energy System] at the end of June 2008. The president of the European Bank for Reconstruction and Development (EBRD), which has invested Euros 1 billion in Russia’s electricity system, said the break up of this operator would mean “Russia is better prepared to attract the huge investments needed to modernise its power networks, improve energy efficiency and ensure it has the capacity required to fuel a surging economy.”

Cross-border capacity
In the meantime, what of the EU companies – are they planning for full interconnection eventually between Russia and the EU? “I think that quite frankly the priority in Europe in the foreseeable future has to be how to connect up the European markets,” said Dr Christian Drepper, spokesman for the German power giant E.On.

“The EU says repeatedly that one of the great barriers to a European energy market is that we do not have enough cross-border capacities,” he told Modern Power Systems. “This is something that we as a company are investing heavily in. It has to be the first step.”

The second step, he said, “might be to look for inter-connections with Russia, but don’t forget there is Poland in between, also Ukraine and other countries so we would have a lot of negotiating to do first. This kind of negotiation is never simple or easy. Think of the cross-border capacity between France and Spain and between Germany and France – there is nothing, or almost nothing. Look at all the problems between Italy and the rest of Europe. There is much to do here before we consider the technical problems of establishing the Russia link.”